A Year in Review (First of a Series)

The notion that the middle market has reached a level of maturity was supported by a plethora of evidence this past year. For one thing, arrangers showed astonishing underwriting capacity by taking on a number of large-cap sponsored buyouts. Probably the most precedent-setting was Qlik Technologies. At just over $1 billion, this Ares-led unitranche represented a genuine “shot-across-the-bow” to traditional investment banks whose province is typically the mega-LBOs.

But Qlik was hardly alone. Other large unitranche executions included Golub’s Marketo ($400 million), SRP Companies ($303 million) and Ansira ($300 million) – both by Antares, and QualaWash ($250 million), co-led by Carlyle, Antares and Madison Capital.

The other remarkable attribute of these deals was that they were not distributed widely in the manner of most broadly syndicated loans. Instead, arrangers and sponsors selected a discrete group of lenders, mainly non-banks, to form the underwriting club. Each of these lenders have amassed significant side pockets of capital that permit them to comfortably hold well over the $40 million or so the bank crowd typically retains.

This “cargo pants” strategy (as we’ve dubbed it) has turned loan syndications on its head. Instead of slicing up smaller pieces for pure buy-side shops, middle market arrangers are feeding them to their self-controlled funds. Golub, for example, has honed this technique to a fine art, allocating loans amongst a large number of vehicles including its own BDC, CLOs, and separate managed accounts.