Private Equity Firm Warburg Taps Apollo For $1 Billion Loan To Bypass Banks

Warburg Pincus turned to investment giant Apollo Global Management Inc. for a $1 billion loan to pay down bank facilities involving an older fund.

The loan was secured by a portion of investments in a $15 billion fund that Warburg launched in 2018, according to people familiar with the matter. The private equity firm had been in talks with several lenders as it considered taking out this unorthodox yet increasingly popular type of borrowing known as a net asset value loan.

Warburg’s decision to go with Apollo marks the first time the private equity shop has turned to an institution other than a bank for such financing to borrow against a portfolio of companies. The firm wanted to extend its sources of fund financing beyond Wall Street banks, said a person with knowledge of the matter.

Warburg’s move underscores the rise of money managers such as Apollo in providing complex forms of debt, as banks pull back on lending amid a new regulatory environment. Investment firms had already gotten bigger in the business of making loans after the 2008 financial crisis spurred new bank regulations.

Wall Street firms are again facing higher capital requirements as financial overseers look to bolster the bank system after a series of regional bank collapses earlier this year. This is giving money managers another opening to take on banks and provide more esoteric flavors of debt to bigger shops.

While NAV-loan borrowers have historically been smaller shops with funds that are under stress, blue-chip firms are warming to the idea and reshaping the market. These complex loans can be used to expand portfolio companies, bolster returns, and help bigger private equity firms ride out bumpy markets.

Sticking Point

These loans aren’t cheap and can command double-digit interest rates.

That’s become a sticking point for pensions and endowments that make private equity investments, some of which have reprimanded buyout firms for forfeiting returns to gin up extra cash.

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Meanwhile, the firm overseeing more than $84 billion obtained a lower rate because the loan isn’t being used to distribute cash to investors. Instead, the new debt will pay down other outstanding bank facilities and generate spare cash to grow its portfolio companies.

Warburg has returned more money to its limited partners across funds than it has invested over the past five years.

Apollo, flush with cash from its Athene insurance arm, has made clear its ambitions to become a bigger lender as banks retrench.

Many of these deals happen quietly, though. Warburg didn’t need to get investors to sign off on the latest loan. The fund taking out the loan never hit leverage levels that would call for the private equity manager to seek clients’ permission, one of the people said.

Source:  Reuters

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