Babson Capital Management LLC, which oversees more than $100 billion, is betting on weak U.S. growth by limiting its equity holdings of companies acquired in leveraged buyouts.
“We believe economic growth will be pretty sluggish for the next few years so we are making a strategic decision to take a more defensive posture, meaning we prefer to get a bit more of our return from coupons of the investments rather than equity kickers,” said Michael Hermsen, a managing director who co-heads Babson Capital's Mezzanine and Private-Equity Group in Springfield, Mass.
Investors like Babson Capital take equity stakes through so-called mezzanine financing, a blend of equity and debt that LBO firms use to fund buyouts. In a bear market, investors typically prefer to receive a stable stream of interest payments from the debt rather than bet on rising equity values.
The U.S. economy may be headed for a slowdown after expanding at a 3.6% pace in the nine months through the first quarter. Job creation was less than forecast in May, with an unemployment rate of 9.7%. The economy may grow at a slower pace of 2.6% next year, according to the International Monetary Fund.
Babson Capital is targeting returns of about 15% for its $5 billion of mezzanine and private-equity funds, compared with 13% in 2007, according to Mr. Hermsen. Holders of mezzanine debt rank after other creditors getting their money back in the case of bankruptcy and get paid higher yields to compensate.