By Katy Burne and Leslie Scism
American International Group Inc. and private-equity firm Oak
Hill Capital Partners are launching a venture to lend money to
midsize companies.
Varagon Capital Partners, to be based in New York, will be owned
half by AIG, which is committing $1.5 billion to make loans, and
half by Oak Hill, its executives said. The loans will be held on
AIG's balance sheet, but Varagon will be responsible for
originating and managing the loans as well as working with
borrowers.
Varagon will seek to make loans to companies with $10 million to
$75 million in ebitda, or earnings before interest, taxes,
depreciation and amortization--a measure of their operating
performance, said the executives. It plans to offer loans primarily
through private-equity owners of the borrowers, which often have no
credit ratings or track records, said the executives.
AIG plans to generally keep as much as $100 million of any
individual transaction on its books, before selling smaller pieces
of the loan to outside investors. Loans to middle-market companies
are sometimes secured by the borrower's assets.
With the new venture, AIG is seeking to generate higher returns
in a world of low interest rates by making loans to companies that
often fall outside traditional bank lending parameters. Banks are
increasingly focused on making lower-risk loans to big
corporations. Several alternative lenders known as
business-development companies have also cropped up to make loans
to riskier, smaller borrowers.
There were $230 billion of middle-market loans outstanding at
the end of 2013, according to KBW, and new loans by some specialty
lenders in that segment bear interest rates in the range of 8% to
11%, said Mr. Mason.
AIG already is an investor in low-rated or so-called "leveraged"
loans to midsize companies, but the new venture allows them to
originate new loans through Varagon without going through a
matchmaker. The insurer also already has a large business making
loans directly to commercial real-estate developers.
"This platform will begin our path to a material presence" in
middle-market lending, said Ted Etlinger, head of leveraged capital
at AIG, which had $547 billion in total assets under management as
of March 31.
The shift also reflects AIG's turnaround effort after the
insurer's near-collapse resulted in a $182 billion bailout from the
U.S. government in 2008.
New York Life Insurance Co.'s investing arm also does
middle-market lending through its affiliate Madison Capital Funding
LLC. That unit in 2012 joined with with Apollo Investment Corp.,
part of private-equity firm Apollo Global Management LLC.
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