17Capital, a financier to buyout groups, has raised $2.9bn for its first credit fund, which will lend money to private equity funds that want to juice returns by using more leverage to strike deals.
The London-based investment firm, backed by Oaktree Capital, is already a pioneer in lending money to private equity funds by allowing them to borrow against the value of their portfolio companies. Such arrangements allow funds to acquire assets without having to tap their investors for capital.
“We are lending to private equity funds and helping them make additional investments in existing companies, or to buy out co-investors, helping them create more value for their investors,” said Pierre-Antoine de Selancy, managing partner at 17Capital, in an interview.
The firm’s debut credit fund, one of the largest in the private debt space, is targeting a yield of as much as 9 per cent and comes as cash pours into the buyout industry via increasingly complex structures.
Founded in 2009, 17Capital has pushed the envelope to find more exotic ways of financing the private equity industry. It is a provider of so-called net asset value lending, where a private equity fund will finance up to 20 per cent of its NAV using debt.
This borrowed cash is then used by a portfolio company to help pay for an acquisition, potentially increasing the fund’s overall value in future years, albeit by taking on greater risk.
17Capital typically lends to private equity funds with between $1bn and $5bn in assets under management, but it is increasingly targeting larger players.
In March, Oaktree Capital Management, the distressed debt investor founded and co-chaired by Howard Marks, acquired a controlling interest in 17Capital for an undisclosed price. The deal was intended to expand the business in North America and help it finance larger deals as buyout firms raise ever-bigger funds.
Before raising its credit fund, 17Capital had offered financing by making preferred equity investments in private equity funds, deploying more than $7bn in 78 such deals since its founding.
Inclusive of preferred equity financing and its newly formed credit fund, 17Capital is willing to provide funding of about 50 per cent of a fund’s net asset value, said de Selancy.
He characterised the financing arrangements as an appropriate way to bolster investment returns and manage cash more efficiently in a low-interest rate world.
“Leverage is extremely efficient if it is used properly,” De Selancy said. “If it is used properly, carefully and with good purpose, it is a really good thing.”
In recent years, private equity firms have been able to raise money in a plethora of ways, such as by selling minority stakes in the holding company to other funds that want a slice of fee income. Buyout firms have also recently sold billions in fixed-rate debt to insurers.
Some private equity funds also have their own credit facilities, called “subscription lines”, which give them the ability to invest and strike deals without immediately drawing capital from their limited partners.