General Electric Co.’s decision to sell its commercial lending business is a boon for private credit managers, several managers say.
“GE has the largest market share for sponsor-backed leveraged buyouts,” said Theodore Koenig, president and CEO of Chicago-based private debt firm Monroe Capital LLC.
“GE’s sale of the sponsor finance business is going to create a major shake-up in the industry, and clearly some reordering of the competitive balance,” Mr. Koenig said.
GE Capital Corp. has $74 billion of assets in its U.S. commercial lending and leasing business, including middle-market lending, according to S&P Capital IQ. It also includes the $16 billion sponsor finance business, which has long-term relationships with more than 300 private equity sponsors.
Some private debt managers already are hearing from GE Capital clients.
“Whenever there is perceived uncertainty or lack of reliability, customers are going to look to others in the space,” Mr. Koenig said. “We are already getting calls.”
Last year, GE Capital’s leveraged finance business, GE Antares, provided more than $27 billion in financing, making it the most active lender to private equity-backed companies in the middle market, according to GE’s fourth-quarter fixed-income investor relations update released in January.
GE Capital also has an active health-care financial services business.
Not only was GE Capital a major competitor to private debt managers, but also it had a huge advantage over them. As a regulated-lender affiliate, GE Capital could get low-cost loans by borrowing from the government, Mr. Koenig explained.
With any spinoff of GE Capital’s commercial lending business, that benefit will be lost and any acquirer will have to borrow at the same rate as the other private debt managers.
“Guys with private funds will have more of level playing field,” he said.
Erik Falk, member and global head of private credit in the New York office of KKR & Co. LLC, agrees that GE Capital’s exit from commercial lending will increase private debt investment opportunities.
“GE was a major player that is now exiting the market, creating even more demand,” Mr. Falk said. “We expect that as the market shifts from buyers to sellers, spreads will widen.”
At the same time, some of GE Capital’s business might prove to be an investment opportunity with private debt managers, large money managers, insurance companies and possibly large asset owners seeking to buy GE Capital’s leveraged loan and health-care finance businesses. Multiple potential buyers are expected to consider the portfolios, which are expected to be sold in an auction process, sources said
Mr. Koenig said he expects GE Capital’s leveraged loan and heath-care finance businesses to be sold separately “as they are really two separate and distinct businesses.”
“It is unlikely to go to another bank because any such bank buyer would likely have the very same regulatory issues that GE has with the business,” he said. “It is more likely to go to a large insurance company, a large pension fund or a very large asset management firm. Any such firm would need to be a large enough to digest the GE business. It could be a domestic firm or a foreign firm, as this asset class is very popular today.”
But Jonathan Grabel, chief investment officer of the $14.5 billionNew Mexico Public Employees Retirement Association, Santa Fe, sees the sale of GE’s commercial lending as an example of a benefit that is available to investors who have cash to buy when an investment opportunity comes along. New Mexico PERA invests in private debt strategies through its private equity allocation and what fund executives call its “fixed-income plus” allocation.
“The GE announcement is somewhat of a separate issue. If you have cash, you can find value if there is a motivated seller,” he said.
