Can anyone give some insights about specialty lenders such as GS Specialty Lending or TPG's Specialty Lending platform? They both sit within their respective Special Situations Groups.
I'd be interested in
* the actual work you do and how much different it actually is compared to traditional lending at banks
* is it just a fancy name for plain-vanilla direct lending or is there some difference to let's say Ares or Permira direct lending?
* do these platforms provide DIP financing?
* they don't seem like loan-to-own platforms but what happens if the debt turns sour? Will the wider Special Sits team deal with it?
* what are exits from these types of roles?
Thanks!
Anyone?
The TPG group mostly lends to other PE firms deals. It is comparable to Antares or Madison in terms of the role in the market. Work is somewhat more fast paced and deal driven than a typical commercial bank. Don't believe TPG is a DIP lender, not sure, but definitely not a loan to own platform.
GSLP lends mostly to off-the-run industries where enterprise value isn't correlated to cash-flow (eg software). They support of mix of sponsor and non-sponsor backed companies. Don't believe they do DPs or loan-to-own strategies. Can't speak to the work environment.
My guess is that both places would be a good training ground if you wanted to understand and build a career in credit. They both are active in the market and well respected.
The job duties for an associate at a specialty lending group (or any credit fund) would involve doing/assisting with the following:
1) Mark up / execute the NDA to receive materials 2) Get CIM from banker or PEG 3) If the business passes the smell test, build a model and get initial support from committee to move forward 4) Submit an IOI/LOI outlining terms, pricing, etc. 5) If selected to advance to final stage, assist investment team with diligence for 30-45 days which includes the following: 5a) Attend management meetings, build detailed model with multiple case scenarios, dig through data room and analyze things like customer churn, profitability per cohort, profitability by SKU, etc. 5b) Write ~30 pg credit memo outlining everything you learned about the biz 6) Present diligence findings/materials/credit memo to final investment committee 7) If approved, fund the $$ to complete transaction 8) Monitor company to make sure they're not shitting the bed, and assist with any follow on transactions
Common exits for credit fund associates are to other credit focused funds like BDCs, mezz shops, and even to LBO funds as the work isn't all that different at the Associate level. You won't be as involved in the daily operations of the business compared to LBO fund associates, but the important tasks (analyzing a business, modeling, etc) are very similar and things like negotiating SPAs, etc can be learned.
What a great summary
Great stuff guys, very helpful!
ebit_dab : One quick follow-up question for you (or anyone else who wants to chime in):
In PE you get the IM, check the opportunity and run a quick LBO to check whether the returns are worthwile. How is an investment usually assessed in the Specialty Lending world (modelling-wise)? Would you build an operating model and then assess how much interest it can pay by inputting various financing terms? Just wondering what kind of modelling you do to assess returns. Thanks again!
The modeling will very similar at a buyout fund vs BDC/credit fund. You build the same 3 statement model, but instead of focusing on IRR/MoIC, the team would be focused on debt paydown and leverage during the hold period to see if the company's FCF can support the new debt payments.
IRR tables are not important in a rate-only debt deal because you know what your return is going to be (add ~1% to your proposed rate because you'll collect a small origination fee as well as benefit from compounded PIK if there is any, and that's your return. For example. if you issue a mezz note at 12% [10% cash and 2% PIK] your IRR will be ~13.5%... no need to build a returns calc to figure this out). If the proposed structure includes some equity-like components (e.g. warrants), you'll obviously have to build out the same returns analysis / waterfall as the LBO guys.
On most deals (both debt and equity) you can get by with a very basic and high level model for the initial IOI. Don't even worry about forecasting the balance sheet or cash flow statement. Instead, create a simple income statement (no detailed rev build) getting to EBITDA and grow top line by a small % every year. You can forecast future working capital needs by multiplying the YoY increase in revenue by 15%. Make conservative assumptions for capex, D&A, taxes, etc. for the projected years. Finally, build out a small debt schedule and compare the FCF generated to the required principal and interest payments. Build out a small returns table if there's equity involved. This whole thing should take 15 minutes from scratch. Keep it simple at the IOI stage as you're just trying to compare cash flow generation to debt paydown.
ebit_dab is 1000% spot on.
Incredibly helpful, thanks a lot for this.
So in summary: At the IOI stage, in PE you do a quick return analysis to see if the potential transaction can spit out a proper IRR, while in credit you focus on whether the company can service the debt. Understood!
Curious whether anyone sees bank lending analysts (usually corporate banking or ABL) get jobs with specialty lenders
Pretty common for corporate banking/cash flow lending jobs. Most of the top-tier credit funds/specialty lenders look for people with a strong lev fin background (i.e. Involvement in the origination/structuring as well as the diligence stage).
Any idea of other large players in the space/players in general? Is this the same thing as Asset Backed Finance/Lender Finance Groups?
Look at Asset Managers. They may do some ABL, but that's not how I would classify it.
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