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Investors are becoming more comfortable with Sankaty Advisors’ approach to mid-market lending, Michael Ewald, managing director at Sankaty, told Buyouts after the firm closed its second dedicated fund at nearly $1.4 billion.
Sankaty Advisors, the credit arm of Boston-based Bain Capital LP, has done this kind of investing since Sankaty’s establishment in 1998, but it has done so historically out of the firm’s multi-strategy funds. The firm raised $900 million for its inaugural mid-market fund in 2010, in the wake of the financial crisis.
“I think there’s a little more clarity on the LP side about what the middle market entails,” Ewald said. LPs are allocating commitments now to an “opportunistic credit bucket” in contrast to conventional strategies such as private equity or fixed income. The pools are structured closed-end funds like a buyout fund but provide current income.
Coming out of the financial crisis with conventional lenders such as banks pulling back from leveraged lending, Bain Capital found that its LPs wanted to target their own investing strategies more precisely, Ewald said, and in addition, “we saw bigger opportunities in certain segments of the market than we could target with a multi-strat fund. One of those opportunities was the middle market.”
The middle market offers higher yield with lower leverage than large-cap borrowers, and it provides stronger documentation, with maintenance covenants and financial covenants, and better information, with financials on a 30-day lag with access to management teams and sponsors, versus quarterly filings and calls with groups of analysts that are typical of high-yield bond issuers, Ewald said.
The firm raised $1.38 billion from 142 investors for Sankaty Middle Market Opportunities Fund II LP, according to a regulatory filing in December. The tally was above the $1 billion target and near the $1.5 billion hard cap for the vehicle.
The firm has an international focus for the mid-market fund, targeting borrowers with EBITDA of $10 million to $75 million in North America, Europe and Australia/New Zealand. Sankaty has members of its 20-person mid-market team in Chicago, Boston, London and Melbourne.
Sankaty has a typical hold size of $20 million to $75 million per mid-market credit, Ewald said. The inaugural fund was invested 60 percent to 65 percent in subordinated debt, with another 20 percent to 30 percent invested in senior debt and the remainder in equity co-investments.
About 70 percent of the borrowers are backed by conventional sponsors, with 15 percent unsponsored, such as family businesses, and the remainder of borrowers backed by independent sponsors such as fundless sponsors, Ewald said.
The mid-market team also has access to the industry-specific groups elsewhere in Sankaty. Metals and mining, for instance, has specialized issues and terminology, as do many industries, so the resources improve the team’s decision-making, Ewald said.
“We’re asking questions 11 through 20 rather than questions one through 10.”