UPDATE: This story has been updated to reflect comments from the firm and fundraising details.
The absence of senior debt from the market has clearly driven the year’s decline in M&A. But middle market buyout shops are finding new places to obtain financing for their deals.
One we outlined earlier this week is regional banks. Another is new pools of capital. A perfect example is Chatham Capital, a mezzanine investor located in Atlanta, Georgia. The firm typically invests between $2 million and $60 million worth of capital in sub-debt, but according to a source, the firm started a separate “one-stop” fund with capabilities for both senior debt and mezzanine lending. The fund seeks mezzanine-like returns, and is willing to hold up to $30 million to $40 million of debt on its books without the need for syndication, the source said.
Chatham has gathered 380 million for this “one-stop” strategy and is raising more. According to regulatory filings, the firm raised over $300 million with Chatham Cascade Fund III. In a separate filing, Chatham Filed with the SEC on July 30, the pool has raised an additional $30 million in commitments from 30 investors, toward a target of $150 million, expandable to $300 million. The firm’s prior fund, Chatham Investment Fund III LLC, was raised in 2007 and Chatham is half way through investing $350 million in that fund currently.
Brian Reynolds, the firm’s Managing Partner, said “ The weakness in the Senior and Junior Capital Markets caused by the CLO market substantial downsizing has provided a permanent change in the market where there is extraordinary demand for acquisition financing with little capital to meet the demand. The result is an environment where risk is reduced for lenders and relative returns are increasing.”
Chatham is one of many firms that sees an opportunity within the dislocation of the credit markets. For example, buyout firm MidOcean Partners recently launched a credit business called MidOcean Credit Partners. In June the firm hired Steve Shenfeld, a former general partner with Avenue Capital Group and Deerfield Capital vets Mike Apfel and Jim Wiant. In a press release, the firm’s CEO, Ted Virtue, said, “We believe that the dislocation in the credit markets will continue to bring great opportunities to deliver strong risk-adjusted returns to our investors.”
Meanwhile, hordes of professionals that were laid off from the lending houses have hung their own shingle. Recently a group of ex-American Capital professionals teamed up to launch a new mezzanine fund called Boathouse Capital. Beyond that, CastleGuard Partners launched from the ashes of Freeport Financial, which earlier this year laid off all but four of its employees. Last summer the former vice chairman of CIT Group launched Tygris Commercial Finance Group, and former American Capital professionals formed Maranon Capital.
Thomas H. Lee Partners is raising $300 million in a blind-pool public offering through a new vehicle called THL Credit Partners. The fund intends invest in private subordinated debt investments of middle-market companies.