17Capital, a buyout group financier, has raised $2.9 billion for its first loan fund, which will lend money to private equity funds that want to maximize 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 rely on their investors for new capital.
“We lend to private equity funds and help them make additional investments in existing businesses, or 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 company’s first credit fund, one of the largest in the private debt space, is targeting a yield of up to 9% and comes as money pours into the buyout industry via structures of more more complex.
Founded in 2009, 17Capital has pushed the boundaries to find more exotic ways to fund the private equity industry. This is, for example, a provider of so-called net asset value loans, where a private equity fund will finance up to 20% of its net asset value by borrowing.
This borrowed cash is then used by a holding company to help pay for an acquisition, potentially increasing the overall value of the fund in future years, but taking on greater risk.
17Capital typically lends to private equity funds with $1 billion to $5 billion in assets under management, but increasingly targets larger players.
In March, Oaktree Capital Management, the distressed debt investor founded and co-chaired by Howard Marks, acquired a majority stake in 17Capital for an undisclosed price. The deal was intended to grow the business in North America and help it fund larger deals as buyout companies raise ever-larger funds.
Prior to raising its loan fund, 17Capital had offered financing by making preferred stock investments in private equity funds, deploying more than $7 billion in 78 such transactions since its inception.
Including preferred equity financing and its new loan fund, 17Capital is willing to provide financing of around 50% of a fund’s net asset value, De Selancy said.
He described financing arrangements as an appropriate way to bolster investment returns and manage liquidity more efficiently in a low-interest world.
“Leverage is extremely effective if used correctly,” De Selancy said. “If used correctly, carefully and wisely, it’s a very good thing.”
In recent years, private equity firms have been able to raise funds in multiple ways, such as selling minority stakes in the holding company to other funds that want a slice of fee income. Buyout companies have also recently sold billions of fixed-rate debt to insurers.
Some private equity funds also have their own credit facilities, called “subscription lines”, which allow them to invest and enter into deals without immediately drawing capital from their limited partners.