Penfund wrapped up its sixth mid-market fund, raising $1.15 billion, thanks to a private-debt strategy that resonated with investors.
Penfund Capital Fund VI, launched in early 2018, closed in December above its $900 million target, Chairman and Partner John Bradlow and Partner Richard Bradlow told PE Hub Canada.
The fund is the largest in the Toronto junior-capital provider’s 40-year history, exceeding by 59 percent the $724 million its predecessor raised in 2016.
The close brings assets managed by Penfund to $1.8 billion.
Strong appetite for private debt
Fund VI met its hard cap with the help of existing limited partners, which “re-upped at a very high rate” and grew their commitment sizes, Richard Bradlow said.
Additionally, several new investors signed on. In all, some 40 LPs committed, including endowments and foundations, family offices, insurers, pensions and wealthy individuals in Canada, the United States, Europe and Asia.
Penfund found strong appetite among LPs for private-debt opportunities.
The firm is a specialty lender to, and equity investor in, North American mid-market companies. Its primary focus is debt financings, such as second-lien, mezzanine and high-yield loans, which represent up to 90 percent of deployments.
Most loans support deals sponsored by private equity firms, such as Bain Capital, J.H. Whitney, Leonard Green & Partners, OMERS Private Equity, ONCAP and Thomas H. Lee Partners.
LPs were drawn to the strategy because it offers “equity returns with bond-like risk,” an especially attractive factor when valuation levels are high, Richard Bradlow said.
Since Fund I closed in 2000, Penfund has earned an annual net return in the mid-teens, he said.
More capital for bigger deals
Fund VI will maintain Penfund’s strategy, accounting for recent changes in market dynamics. They include a greater emphasis on large transactions with expanded credit needs.
The fund will invest in 10 to 15 financings sized $50 million to $120 million, up to a maximum of $230 million.
Target companies will generate annual Ebitda of at least $20 million. Half the deals are expected to engage existing borrowers, operating in sectors in which Penfund has experience, such as business services, consumer and healthcare.
The fund is expected to deploy 75 percent of its capital to the U.S. market, where much of the growth in Penfund’s dealmaking has been located.
This is reflected in Fund V’s activity. It invested in 11 companies, including Aveanna Healthcare, an Atlanta pediatric home-healthcare provider backed by Bain and J.H. Whitney, which Penfund helped finance in 2017 with US$75 million in second-lien debt.
Other recent activity includes last year’s $55 million investment in OMERS-owned CBI Health, a Toronto rehabilitation and home-health-services business.
Along with adding assets to the portfolio, Penfund has been shedding them. In November, it sold SureWerx, a Vancouver tools, equipment and safety products supplier, to Riverside Co.
The sale of SureWerx, an example of the firm’s stand-alone transactions, generated 4x invested capital, Richard Bradlow said.
Fund VI has already closed two deals, including a refinancing of GoodLife Fitness Centres, a London, Ontario, fitness-chain manager backed by Penfund since 2004.
A third is expected to be completed next month, at which point the fund will be more than 30 percent invested.
Further dealmaking will be supported by new personnel, Richard Bradlow, John Bradlow’s son, said.
This will include building out the origination team overseen by Partner Joe Mattina, hired last year from Apollo Global Management.
Founded in 1979, Penfund was acquired from CIBC in 2000 by John Bradlow and another partner.
Since then, the partnership team, which includes Adam Breslin, Nicole Fich and Jeremy Thompson, has invested $1.6 billion in 47 deals. The firm reports only one realized loss, of $1.4 million, during this 19-year period.