Babson Raises $917 Million for U.S. Lending Fund
Babson Capital Management LLC, the investment firm owned by Massachusetts Mutual Life Insurance Co., raised $917 million for its first U.S. mezzanine and private-equity fund since the financial crisis.
Tower Square Capital Partners IV brings the amount available for loans to mid-sized companies globally to more than $3 billion, Charlotte, North Carolina-based Babson said today in a statement. The cash will be used to finance buyouts of mid-sized firms.
Institutional investors are looking to generate extra income with interest rates repressed by the Federal Reserve’s zero interest-rate policy. Insurer American International Group Inc. (AIG) said last week that it started a lending venture with Oak Hill Capital Management.
“People are still looking for yield in this low-rate environment,” Tom Finke, Babson’s chief executive officer, said in an interview. “We still think there are deals out there that, even in a tighter-yield environment, provide a risk-return profile that is attractive.”
Babson manages about $200 billion for clients such as pensions, insurers and endowments, mostly in bonds. The company’s Cornerstone Real Estate Advisers unit specializes in commercial property and accounts for about $42 billion of that figure.
The middle-market finance operation, with 34 investment staff, typically lends to companies with $10 million to $75 million of earnings before interest, tax, depreciation and amortization.
About half the money committed to Tower Square IV came from MassMutual, Brian Whelan, a Babson spokesman, said by e-mail. Other investors include insurers, pensions and non-U.S. financial firms.
The fund has an investment period of as much as five years after closing in January, Whelan said. The company has the ability to increase the fund’s size to $1.6 billion. he said.
Babson’s $1.6 billion Tower Square III fund closed in 2008, and the $1 billion Tower Square II dates to 2005. The funds are named for the site of Babson’s Springfield, Massachusetts office.
Deposit-taking banks have been pushed by regulators to boost underwriting standards for loans issued by speculative-grade rated companies. The Federal Reserve, Office of the Comptroller of the Currency and Federal Deposit Insurance Corp. updated guidance for leveraged lending in March 2013 for the first time in more than a decade.
The middle-market mezzanine loans made by funds like Tower Square IV typically have a coupon of 14 percent, with 12 percent paid in cash and 2 percent compounded to the principal, said Ben Silver, a managing director at Babson. The market has tightened, he said: lenders are less likely to receive warrants tied to the deals, and some loans now pay 11 percent cash interest.
Still, because interest rates have declined on high-yield, high-risk bonds, the relative returns on mezzanine financing remain attractive, Silver said.
“The rates have come down a little bit,” he said. “With rates being so low for so long, more investors started looking at mezzanine.”