By Ryan Dezember And Gillian Tan
Several private-equity firms are vying to buy General Electric
Co.'s unit that funds leveraged buyouts, in a sale process that
could fetch more than $17 billion for GE and be the largest U.S.
finance deal since the financial crisis.
KKR & Co., Apollo Global Management LLC and Ares Management
LP are among the firms expected to submit final-round bids for the
unit Thursday, according to people familiar with the sale process.
Canada's largest pension fund, Canada Pension Plan Investment
Board, and Guggenheim Securities also are expected to submit
offers, the people said.
An agreement could be announced as soon as next week, the people
added, and is on track to surpass deals including Wells Fargo &
Co.'s 2008 purchase of Wachovia Corp. and Toronto-Dominion Bank's
2010 purchase of Chrysler Financial Corp., according to
Dealogic.
A deal would be a big boost for the private-equity firms
competing for a business that finances their buyout deals and those
of their rivals. Several have lending and debt-investing arms of
their own. They have taken a bigger share of the lucrative business
as banks, under pressure from regulators, become increasingly wary
about financing debt-laden takeovers. Private-equity firms
announced $37 billion in new investments through May 15, the lowest
year-to-date total since 2012, according to Dealogic.
Middle-market lending is at "top of mind for everyone today,"
Apollo co-founder Josh Harris said at the Bernstein Strategic
Decisions Conference on Wednesday. He called GE Capital the
"largest and most successful lender on the planet." He didn't
comment on Apollo's interest.
The GE business, which is part of GE Capital, focuses mainly on
financing midsize buyouts. It lends money to pay for the buyout of
a company by the private-equity firm and to help fund its
operations. In all, the business encompasses a bundle of more than
400 loans, most of which are for less than $100 million. The
business consists of a team of about 300 people that originate new
loans and manage the portfolio. GE is eager for a buyer to absorb
that group, the people said.
The sale is part of GE's efforts to unload the bulk of its GE
Capital business. Last week, GE Chief Executive Jeff Immelt said he
expected to announce $20 billion to $30 billion in additional sales
by the end of June. Keith Sherin, the CEO of GE Capital, told
investors Wednesday that the company would be largely done with
asset sales by the end of 2016. At the time it announced the broad
retreat from banking, the company agreed to sell a $23 billion
real-estate portfolio to Wells Fargo & Co. and Blackstone Group
LP. GE is also selling a portfolio consisting of $74 billion of
loans to U.S. businesses.
A private-equity buyer would likely face some challenges running
the business that GE didn't. The company's balance sheet and
near-perfect credit rating gave the business cheap access to cash,
which it could lend at higher interest rates. Private-equity firms
will likely have to rely on banks as a capital source, which means
new loans could be costlier for both the lender and borrowers.
And the auction may not produce a private-equity winner.
Canada's CPPIB, which invests billions of dollars in buyout funds,
has in recent years started making its own private-equity deals.
And Guggenheim operates a direct-lending arm, which invested about
$6.5 billion in 129 deals as of Sept. 30, 2014.
Some other bidders--such as foreign banks, sovereign-wealth
funds and insurance companies--also are expected to participate in
the final round of the auction, according to people familiar with
the process.
Many of them could help fill a void left by the large banks,
which have been under pressure from regulators to avoid lending to
companies with high debt loads. After the financial crisis, U.S.
regulators required banks to hold more capital on their books to
ensure they can survive a sharp downturn. That has decreased their
ability to hold onto assets on their books that regulators deem
risky, such as some buyout loans.
Regulators also have pressured banks to limit the loans they
extend to heavily indebted corporate borrowers, creating an opening
for nonbank lenders to move deeper into the business.
Ares's dedicated direct-lending unit managed $28.7 billion
across 34 funds as of March 31. That is roughly twice the size of
its private-equity unit, which manages $14.8 billion.
Apollo earlier this month signaled plans to expand its sizable
credit business, and KKR in April said it raised $1.34 billion for
a second fund that will provide loans to companies, bringing its
direct-lending total to roughly $5 billion.
"The lending landscape is being reshaped by a variety of
factors, including geopolitical change, macroeconomic factors, and
the regulatory environment," Chris Sheldon, KKR's co-head of
leveraged credit, said at the time.
GE, which enlisted J.P. Morgan Chase & Co. and Citigroup
Inc. to auction off the buyout-finance business, recently narrowed
down the suitors from an initial round involving a dozen
bidders.
The private-equity bidders are lining up financing from large
banks to fund the purchase of the unit, according to people
familiar with the matter. The financing is backed by the assets of
the borrowers behind the loans being sold by GE, according to the
people.
The firms are seeking to borrow roughly 85% of the GE unit's $16
billion book value, one of the people said.
Dana Mattioli contributed to this article.
Write to Dana Mattioli at dana.mattioli@wsj.com and Ryan
Dezember at ryan.dezember@wsj.com
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