H.I.G Funds to Invest in Middle-Market Debt, Direct-Lending Opportunities

Raises $1.1 billion from foundations, endowments, public and private pensions, and sovereign wealth funds.

H.I.G. Whitehorse has raised approximately $1.1 billion for a direct lending fund and a loan fund that will invest in companies that need debt funding options, the credit affiliate of H.I.G. Capital reports.

The funds have attracted investment from a variety of institutional investors, including foundations, endowments, public and private pensions, and sovereign wealth funds.

H.I.G. Capital’s direct-lending team has already invested in 12 transactions from the direct-lending fund, according to the firm. Stuart Aronson, H.I.G. Capital’s head of US direct lending, noted, “The next several years will present a compelling opportunity to partner with non-sponsor and sponsor- owned companies in need of debt capital solutions. We look forward to capitalizing on the firm’s synergistic platform and strong deal sourcing network with originators located in nine cities across the US.”

The funds are looking to provide senior secured-financing solutions, mostly through “non-sponsored” loans, to US “lower middle-market” companies  that are “non-sponsor” and “sponsor-owned.” The financing is not targeted at any specific industry.

Middle-market companies that direct lenders target generally produce EBITDA earnings of $10 million to $75 million on revenues ranging from $100 million to $300 million, according to James Meisner, Commonfund’s head of fixed income, and Vincent Kravec, director. They estimate the size of the “middle market” at about $4 trillion.

Nonbank lenders have been attracted to this space as a result of a vacuum left by the departure of banks that face more stringent regulatory guidelines following the financial crisis of 2007 through 2009.  Direct lending presents an opportunity for nonbanks to capture a higher return in today’s low-interest-rate environment. One basis for the higher return is the “liquidity premium” that investors get for investing in debt that is not very liquid and easily convertible into cash.

Direct lending investments also typically make income distributions at periodic intervals, have a floating interest-rate tied to LIBOR, and provide a yield in the 8% to 12% range.

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