- Direct lender Golub Capital nearly tripled its lending last year to more than $36 billion.
- Private equity firms are increasingly turning to direct lenders for loans formerly handled by banks.
- David Golub sees business continuing to boom in 2022, even as rates rise.
Direct lender Golub Capital has just wrapped up a record year fueled by the private equity industry’s growing appetite for loans. Its president sees the frenzy continuing this year, even if interest rates are slightly higher.
The same is not necessarily true for banks.
“The loans we make have a variable interest rate, so they are relatively protected against rising rates, unlike fixed income securities,” said David Golub, president of Golub Capital.
Direct loans do not lose value when interest rates rise. Banks, on the other hand, are selling some of the debt to institutional investors through fixed rate bonds and will offer these deals at a higher cost to account for a rise in interest rates. With markets pricing in a number of rate hikes over the next two years, banks are likely to do less business in the bond markets.
Golub’s comments come as his business closes a record high in 2021. 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,” Golub told Insider.
The company also had a record fourth quarter, closing more than $15 billion in loans, compared to around $7 billion for the same quarter in 2020. Golub’s record year spanned 371 deals in 2021, and Golub’s president expects 2022 to be as busy as it is private. equity is increasingly turning to other lenders for assistance with acquisitions.
“Deal activity is likely to remain high in 2022, but it will be difficult to match the levels seen last year, which was a record year for private equity mergers and acquisitions,” said Golub, the brother from the company’s founder and CEO, Lawrence, to Insider. “But private equity will likely double in size over the next four years.”
Golub operates in the so-called private credit market, a banking pocket that provides direct loans to private equity firms, which use this funding to support their acquisitions. The asset class, also known as direct lending, has grown to more than $1 trillion, up from around $400 billion 10 years ago, according to Private Debt Investor. According to Moody’s, this could reach around $1.5 trillion over the next five years as investors allocate more cash to alternative investments like private credit, which promise higher returns in the current interest rate environment. lower interest than traditional fixed income securities.
The risk, however, is if the
raises rates too quickly to cause an economic downturn, which could also slow transactions.
“The Fed needs to thread a needle. Raise rates fast enough to contain inflationary expectations, and slow enough not to cause an economic downturn. The risk is that they go over and we have a downturn,” Golub said.
Private equity firms amassed more than $2 trillion in idle 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 shops typically raise some debt from lenders, in addition to their own capital, to buy a holding company.
Typically, investment banks raise $1 billion in funding for buyout firms by selling the debt to multiple investors through the bond or loan markets. The growth of private credit, however, has allowed borrowers to seek giant financing from a single or a handful of lenders.
Golub, for example, has loaned more than $2 billion to Insightsoftware over the past three years, a portfolio company of TA Associates and Genstar, to support its acquisitions. In new business, Berkshire Partners-owned equipment maker Parts Town received a $1.5 billion loan from Golub that backed an equity investment in the business from Leonard Green Partners last November.
It’s not just Golub who benefits. Another direct lender, Owl Rock, provided $2.3 billion to Thoma Bravo for its purchase of fintech Calypso Technology, Insider reported last April. And investment manager Ares led a $2.6 billion loan to back Thoma Bravo’s $6.6 billion acquisition of Stamps.com in July.
Proponents of the direct loan market tout the speed of private credit because 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 market for institutional investors. In exchange, direct lenders generally charge a higher interest rate than Wall Street banks because of the larger pools of capital the latter have in the bond and institutional loan markets.
With the growth of private credit, direct lenders are increasingly able to arrange larger loans that in the past were handled exclusively by investment banks.
Golub said right after the 2008 financial crisis that a large loan from a direct lender would be around $80 million, but today direct lenders routinely make loans over $500 million, transactions that Golub calls “mega one-stop transactions”. In fact, Golub closed 38 one-stop mega-deals in 2021, a record for the company, and more than half of the direct lending market’s loans over $500 million last year, the company said. ‘business.
“The syndicated market will continue to lose share to direct lenders,” Golub said. The syndicated market is where investment banks sell loans they have underwritten to institutional investors. “Direct lenders have proven in 2021 that they can deliver multi-billion dollar solutions.”