Providence Equity Partners is selling its private credit arm, Benefit Street Partners, to Franklin Templeton after 10 years.
Franklin is buying all of Benefit Street’s operations and management fee earnings for an initial $683 million, according to an executive commentary posted on Franklin’s website.
The deal, expected to close in the second quarter of Franklin’s fiscal 2019, calls for $130 million to be used to retire Benefit Street’s debt.
Launched in 2008, Benefit Street is a middle-market direct lender with about $26 billion in assets under management.
The New York firm manages 13 CLOs while offering strategies in high yield, special situations and commercial real estate debt. As of Oct. 19 Benefit Street employed 188, including 106 investment professionals.
Franklin, the global investment manager with $717 billion in AUM, said it is bringing over all current Benefit Street employees and key investment-team members will continue to accrue the majority of performance fees and participate in retention programs.
Benefit Street’s “differentiated approach to investing within the alternative credit space has resulted in a thriving business over the course of the last decade,” said Greg Johnson, Franklin’s chairman and CEO, in a statement.
“The percentage of institutional investors expected to allocate to alternative credit for the long term is substantial, and this acquisition positions us well in a growing market.”
Providence is exiting Benefit Street during a boom time for alternative credit. The asset class is expected to double to an estimated $1.4 trillion by 2023, Franklin said.
More than half (54 percent) of institutional investors are underallocated to private credit and plan to boost their holdings over the long term, Franklin said. Only 37 percent of institutional investors invest in private credit, the asset manager said.
Some analysts on an Oct. 25 Franklin conference call asked why Providence was selling Benefit Street, given the rosy outlook for alternative credit.
“Providence has been a great partner with us from day one,” Tom Gahan, Benefit Street’s founder, CEO and CIO, said on the call. “Our business has become larger [and] more complicated. We have capital needs and distribution needs that couldn’t be fulfilled by existing partners.”
The sale did not result from an auction process or someone “going out saying they want the highest bidder,” said Gahan.
Franklin’s buy of Benefit Street resulted from a relationship with a firm board member, he said. “Our people knew many [Franklin] senior people, going back to the Merrill Lynch days,” he said.
With $60 billion in AUM, Providence is one of the bigger buyout shops. The firm, founded by Jonathan Nelson in 1989, invests in media, communications, education and information industries.
It launched Benefit Street in 2008, at the height of the financial crisis and right around the demise of Lehman Brothers. The sale to Franklin does not include Merganser, the fixed-income manger owned by Providence.
Benefit Street has succeeded in raising several funds.
Its fourth debt fund collected $2.55 billion in December. At the same time, Benefit Street also raised $750 million for its first special-situations fund, Buyouts reported.
Benefit Street in 2014 closed its third debt fund on its $1.75 billion hard cap. The company also has a BDC arm, BDCA, which it plans to list, execs said.
Almost half of Benefit Street’s AUM is private debt, executives on the call said.
The sale to Franklin makes “strategic and economic sense for all stakeholders,” Nelson said in the statement. “We couldn’t be more proud of Tom and the team’s success in building a world-class credit business. This has been a great 10-year partnership, and we wish them continued success.”
The sale is the latest involving a middle-market lender. Golub Capital in August sold a minority stake in itself to Dyal Capital, a unit of Neuberger Berman. In August, ORIX acquired NXT Capital from Stone Point Capital and Ontario Teachers’ Pension Plan.
Action Item: Benefit Street Founder and CEO Tom Gahan can be reached at +1 212-588-6770.