- Direct lender Golub Capital nearly tripled its loans last year to over $ 36 billion.
- Private equity firms are increasingly turning to direct lenders for loans formerly managed by banks.
- David Golub sees business continuing to explode in 2022, even as rates rise.
Direct lender Golub Capital just ended a record year fueled by the private equity industry’s growing appetite for lending, and its chairman sees the frenzy continuing this year – even as interest rates rise slightly.
Golub Capital nearly tripled its lending activity last year, closing more than $ 36 billion in deals in 2021 compared to around $ 13 billion in loans in 2020, giving the lender its “best year ever,” said President David Golub told Insider.
The company also had a record fourth quarter, closing over $ 15 billion in loans, up from around $ 7 billion for the same quarter in 2020. Golub’s record year spanned 371 deals in 2021, and Golub chairman expects 2022 to be such a busy year as private equity increasingly turns to alternative lenders for help with acquisitions.
“Transaction activity is likely to remain high in 2022, but it will be difficult to reach the levels seen last year, which was a banner year for private equity mergers and acquisitions,” Golub told Insider, the brother of the company’s founder and CEO, Lawrence. “But, private equity is likely to double in size over the next four years.”
Golub operates in the so-called private credit market, a bank pocket that provides direct loans to private equity firms, which use this funding to support their acquisitions. According to Private Debt Investor, the asset class, also known as direct lending, has grown to over $ 1,000 billion, up from around $ 400 billion a decade ago. According to Moody’s, that figure could reach around $ 1.5 trillion over the next five years, as investors allocate more liquidity to alternative investments like private credit, which promise better returns in the interest rate environment. lower today than traditional fixed income securities.
The specter of an interest rate hike, meanwhile, is likely to have more of an impact on fixed income bonds than the loans Golub and its competitors make, as they are structured to float alongside interest rates. . Variable rate loans don’t lose value as rates rise, Golub said.
The risk, however, is that if the
rising rates too quickly to cause an economic slowdown, which could also slow down trading.
“The Fed has to thread a needle. Raise rates fast enough to contain inflation expectations and slowly enough not to cause an economic slowdown. The risk is that they overshoot and we have a slowdown,” Golub said.
Private equity firms raised more than $ 2 trillion in unused capital at the end of last year, according to data from Preqin. It’s a trend that will benefit direct lenders, Golub said, as buyout stores borrow money to support their investments. Private equity firms typically raise a portion of lender debt, in addition to their own capital, to purchase a holding company.
Typically, investment banks raise billions of dollars in financing for buyout firms by selling debt to multiple investors through bond markets or loans. The growth of private credit, however, has made it possible for borrowers to seek jumbo financing from just one or a handful of lenders.
Golub, for example, has loaned more than $ 2 billion to Insightsoftware over the past three years, a holding company of TA Associates and Genstar, to support its acquisitions. In the new business, Berkshire Partners-owned equipment maker Parts Town received a $ 1.5 billion loan from Golub that supported an equity stake in Leonard Green Partners’ company last November.
It’s not just Golub who benefits. Another direct lender, Owl Rock, provided Thoma Bravo with $ 2.3 billion for its purchase of fintech Calypso Technology, Insider reported in April. And investment manager Ares led a $ 2.6 billion loan to support Thoma Bravo’s acquisition of Stamps.com for $ 6.6 billion in July.
Proponents of the direct loan market tout the speed of private lending as these deals are often negotiated quickly with fewer lenders, while an investment bank can sometimes take weeks to sell a loan or bond in the investor market. institutional. In return, direct lenders typically charge a higher interest rate than Wall Street banks because of the larger capital reserves the latter have in the bond and institutional lending markets.
With the growth of private credit, direct lenders are increasingly able to grant larger loans which in the past were exclusively managed by investment banks.
Golub said just after the 2008 financial crisis, a large loan from a direct lender would be around $ 80 million, but today direct lenders regularly grant loans over $ 500 million, with agreements what Golub calls “mega one-stop” transactions. In fact, Golub struck 38 so-called mega one-stop-shop deals in 2021, a record for the company, and more than half of the direct lending market lending above $ 500 million last year, the company said. company.
“The syndicated market will continue to lose share to direct lenders,” Golub said. The syndicated market is where investment banks sell the loans they have taken out to institutional investors. “Direct lenders have proven in 2021 that they can deliver multibillion dollar solutions.”