JPMorgan Chase & Co.’s July sale of a $1.3 billion fixed-income and loan portfolio from its Global Special Opportunities Group to Sankaty Advisors, the $24 billion credit affiliate of Boston-headquartered private equity firm Bain Capital, may be exactly what regulators (and Congress) wanted when they rewrote the rules governing the banking industry. Regulators envisioned a financial industry unable to rekindle another economic crisis like that in 2008–’09 and wanted the banks, with deposits insured by the government, to stop making risky investments. That, in turn, meant that other types of financial institutions would need to step up and take their place. Private equity firms have been happy to comply, building out credit businesses that were once the bailiwicks of the banks.
Sankaty, named for a lighthouse on Nantucket, has grown dramatically since its launch in 1998 to become one of the largest private managers of global credit and distressed debt. The firm bought the JPMorgan portfolio, which is filled with idiosyncratic illiquid investments, for two of its funds for institutional investors: the $1.4 billion middle-market lending fund and the $3.5 billion credit opportunities fund. Sankaty won the auction in part because it had the capability to assess illiquid investments, including private mezzanine, distressed and traditional securities, across 16 different industries in Asia, Europe and the U.S. According to several sources, Sankaty could also write a big enough check to buy the entire portfolio, which simplified the transaction for JPMorgan.
Over the course of due diligence on the JPMorgan assets, Sankaty had some 40 people examining individual credits in the portfolio. “In today’s market, you have to work hard to unearth unique and interesting investment ideas,” says Jonathan Lavine, Sankaty’s managing partner, managing director and chief investment officer.
Lavine, who started his career in the M&A department of Drexel Burnham Lambert, was an early investor in alternative credit when he launched Sankaty for Bain. But he couldn’t have foreseen just how dramatically the credit markets would be transformed after the financial crisis, creating opportunities for firms like Sankaty. With banks stepping back from riskier lending because of higher capital charges — particularly reducing lending to middle-market companies — money managers have been stepping into the void. Lavine has been able to anticipate the reordering of credit markets, and Sankaty has one of the longest track records in the industry, but the firm also has an increasing number of competitors, including Apollo Global Management, Blackstone’s GSO Capital Partners, Canyon Capital Advisors and J.P. Morgan Asset Management’s Highbridge Capital Management.
Lavine, who is part of a group that owns the Boston Celtics franchise in the National Basketball Association, says he started the firm because he thought debt was a natural extension of Bain’s investments in the equity of leveraged companies. But credit was still a developing asset class at that time. “People used to view credit as opportunistic. There were times when you committed to it and times when you had no exposure,” he says. Now credit consists of a variety of securities, including different parts of the capital structure, and public and private debt.
Lavine believes there may be more transactions like the JPMorgan deal, but he also notes that his firm sees a variety of upcoming opportunities, especially in Europe. But JPMorgan’s sale to Sankaty just confirms that credit is here to stay. “It’s proved resilient and an important stand-alone asset class,” says Lavine.
Follow Julie Segal on Twitter at @julie_segal.
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