The middle market lending deal between Centerbridge Partners and Wells Fargo may spark similar partnerships in the asset management business.
The two recently announced that they have formed a venture to set up a business development company called Overland Advisors, which will lend directly to middle-market companies, a smaller and less competed part of the private credit market.
The new entity already has commitments from huge institutional investors — Abu Dhabi Investment Authority and British Columbia Investment Management Corporation.
“Even though Wells and Centerbridge are the first, they won’t be the last,” David Dobell, senior managing director, partnership portfolio at British Columbia Investment Management, said by phone on Wednesday. “This will get tapped because it’s just so unique... This is an overdue idea. Credit to Centerbridge and Wells to be the first to figure it out.”
Most middle-market loans are made to companies backed by private equity firms. These companies can be less risky, as they’re vetted by PE, but they are also hot commodities right now. “The vast majority of private credit is sponsored deals,” Dobell said. “Not that there’s anything wrong with it, but it’s very competitive with few barriers to entry.”
This new BDC is different: Overland will invest in non-sponsor-backed deals, sourcing ideas through Wells Fargo’s relationships with smaller companies. Overland certainly isn’t the only firm running non-sponsor-backed private credit deals. But Wells Fargo’s relationships will give the BDC access to far more companies and potential deals than most — and with better transparency into the business.
“Direct lending is a transactional business focused on Wall Street,” Jeff Aronson, co-founder of Centerbridge, told Institutional Investor. “We want to turn it into a relationship business focused on Main Street. This pairing of Wells Fargo’s sourcing, which really is unrivaled, with our credit underwriting, I think it’s a game-changer.”
Compared to some of its peers, Wells Fargo’s strategic capital business, which provides equity and debt to small businesses, is smaller, with $2 billion in committed capital. Instead, its business — the fourth largest bank in the United States — places a heavy focus on investment, commercial, corporate, and individual banking.
“I would imagine that direct lenders have 30 to 40 originators,” said Aronson. “To really cover the U.S. market away from the sponsor world, you would need hundreds or even thousands of relationship officers in virtually every state in the country. That’s impossible even for the biggest direct lenders to crack.”
For Wells Fargo, the benefit is to be able to offer its clients a new type of financing that wasn’t previously available. “We have strong relationships with our clients ─ many that span decades ─ and when clients come to their bankers for advice, Overland allows them to bring a direct lending product into the conversation,” David Marks, executive vice president for Wells Fargo’s commercial banking business said via email.
The deal, which has been in the works for about a year, grew out of Dobell’s relationship with Aronson when he worked at Angelo Gordon before 2005. Likewise, the relationship between Wells Fargo and Centerbridge dates back to the 1990s. Dobell said that his team noticed the sympatico nature of the two businesses.
Dobell added that it will be challenging for another investment manager and bank to replicate this partnership. Most do not have the same middle market reach as Wells Fargo — and if they do, they also have a large investment management business. In that case, it would likely make sense to run this type of strategy internally.
“Out of the four or five banks that were possibilities, Wells is the largest middle market lender, but it’s also the least likely to have done it internally,” Dobell said.
The new BDC will primarily make senior secured loans directly to middle-market companies. There is wiggle room in the mandate: Overland can also put money to work in more traditional sponsor-backed deals.
Overland Advisors plans to raise a minimum of $5 billion in investable capital, which will include $2.5 billion in equity commitments. Both ADIA and BCI are anchor investors on the deal and have provided nearly $2 billion in initial equity commitments.
The two expect to have access to coinvestment deals as Overland begins to deploy capital. Overland’s goal is to start lending toward the end of the fourth quarter or early in 2024.
“This is an area that is largely untapped with enormous barriers to entry,” Dobell said. “On a risk-adjusted basis, it’s even more attractive than traditional private credit.
