Who finances LBO's? Is there significant money to be made as an LBO lender?
Hello Monkeys,
I currently work in lending, and I'm wondering what the most valuable career path would be as a lender. Since so many LBO firms have made tremendous fortunes in the space, it made me wonder if the bank's financing the deals were also getting filthy rich?
Would anyone know if LBO lenders make significant income by financing LBO deals? If so, what is the typical career ladder for an individual working at a bank who finances LBO transactions?
Thank you in advance for any (accurate) intel.
Returns are generally higher for equity investors vs. debt investors given the relative risk of the respective securities. The exception would be funds that specialize in distressed credit, but again incremental returns generally come along with incremental risk (incl. illiquidity).
I think you might be slightly confused about who the actual lenders are. The investment banks (GS, MS, etc.) are the ones who structure and syndicate the initial offering, but most of the actual securities will not be kept by them - though there are exceptions. They are paid a fee for that work, but the interest/principal goes to the syndicate who actually owns the instrument. The firms who actually buy the bank debt or bonds that finance your typical LBO will generally be credit funds who get their money from LPs, similar to PE funds. Someone with more experience working on that side of the world will have to chime in on what the fee structure looks like there and how it compares.
All that being said, I don't think 'getting filthy rich' is a good guiding principle for your career choices. Credit and equity investing are very different at a high level, and even more different when you delve into the specific strategies, i.e. a predominantly first lien lender will do different work than a high yield investor.
Very interesting info, thanks for the reply.
Is the level of lender sophistication dictated by deal size? I presume that MS/GS are the syndicate banks for only the largest & most complex transactions. Whereas regional/local banks handle relatively small deals (
You’re discounting a whole other segment of the market, direct lending. These are non-bank lenders that compete directlywith banks for financing of LBO’s and such. Many of these non-bank lenders take significant chunks of a syndicate loan and are direct competitors to high yield financing. Examples include: Golub, Antares, THL Credit, Ares Direct Lending, etc. Many, if not most of these direct lending shops recruit IB professionals, so starting in IB would be your best bet, not sure about comp or career progression, hopefully someone more experience with the matter can chime in.
I don't know if these guys you've mentioned really compete with the banks, so much as work with them and, as you point out, form part of the financing syndicate. Very rarely if we had difficult to place piece of the cap structure (e.g. a really small 2nd lien), we might go to a Golub and try to place it directly. Golub did try to maintain a direct relationship with us and would send us gifts around the holidays and such, but it was mostly in the hopes that we'd speak up on their behalf with whoever the lead bank would be on a given deal, i.e. so they'd get an outsize allocation when deals were oversubscribed. This might be different in the lower MM, but I can't speak to that.
To OPs follow-up questions: yes, fees are a percentage of the financing size, so the bigger the better. Agree with the guy above about starting in banking. That will give you the most optionality.
The direct lenders are competing with traditional banks in the same way banks compete with one another. They may work together in a syndicate, but they're still competing for agency fees (and cross-sell opportunities, or to get into the deal at all). And as you alluded, in club or bilateral deals (more common as you go down market) they're competing to see who can offer the best pricing and terms. Traditional banks are at a significant disadvantage here because of their regulatory requirements. They may be able to compete on price, but a finco can offer a PE sponsor an extra half- or full-turn of leverage in exchange for a slightly bigger spread. It's a no-brainer for most sponsors - the boost to returns from the extra leverage is well worth the interest payments.
Direct lenders have popped up all over and taken significant share during a very long economic expansion. It'll be very interesting to see how they fare when we inevitably hit a down credit cycle.
Mid-size & larger deals are financed via the CLO market, generally. They are called leveraged loans. Today, even smaller stuff is creeping into the CLO (broadly syndicated) market due to how attractive the terms are & how much investor demand there is for exposure to the loan asset class.
I'd start here: http://www.leveragedloan.com/
Banks dont actually hold exposure to these things anymore. They used to, but now their exposure is typically limited to small pieces of unfunded revolvers. Regional banks dont do this shit either, although I have seen some instances of small regional banks buying small pieces of leveraged loans during syndication.
Most of the LBO financing is now done through credit funds. Its either a direct lender, CLO manager, or a long-only asset manager (like a mutual fund) that end up holding all of the paper. Most of these participants then use fund-level leverage to juice their returns. These guys very frequently lever up 2x to 11x, which helps them generate respectable double-digit annual returns by investing in loans (unless they wiff).
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