AIG, Oak Hill Join to Lend to Midsize Firms

By Katy Burne and Leslie Scism 

American International Group Inc. and private-equity firm Oak Hill Capital Partners are launching a venture to lend money to midsize companies.

Varagon Capital Partners, to be based in New York, will be owned half by AIG, which is committing $1.5 billion to make loans, and half by Oak Hill, its executives said. The loans will be held on AIG's balance sheet, but Varagon will be responsible for originating and managing the loans as well as working with borrowers.

Varagon will seek to make loans to companies with $10 million to $75 million in ebitda, or earnings before interest, taxes, depreciation and amortization--a measure of their operating performance, said the executives. It plans to offer loans primarily through private-equity owners of the borrowers, which often have no credit ratings or track records, said the executives.

AIG plans to generally keep as much as $100 million of any individual transaction on its books, before selling smaller pieces of the loan to outside investors. Loans to middle-market companies are sometimes secured by the borrower's assets.

With the new venture, AIG is seeking to generate higher returns in a world of low interest rates by making loans to companies that often fall outside traditional bank lending parameters. Banks are increasingly focused on making lower-risk loans to big corporations. Several alternative lenders known as business-development companies have also cropped up to make loans to riskier, smaller borrowers.

There were $230 billion of middle-market loans outstanding at the end of 2013, according to KBW, and new loans by some specialty lenders in that segment bear interest rates in the range of 8% to 11%, said Mr. Mason.

AIG already is an investor in low-rated or so-called "leveraged" loans to midsize companies, but the new venture allows them to originate new loans through Varagon without going through a matchmaker. The insurer also already has a large business making loans directly to commercial real-estate developers.

"This platform will begin our path to a material presence" in middle-market lending, said Ted Etlinger, head of leveraged capital at AIG, which had $547 billion in total assets under management as of March 31.

The shift also reflects AIG's turnaround effort after the insurer's near-collapse resulted in a $182 billion bailout from the U.S. government in 2008.

New York Life Insurance Co.'s investing arm also does middle-market lending through its affiliate Madison Capital Funding LLC. That unit in 2012 joined with with Apollo Investment Corp., part of private-equity firm Apollo Global Management LLC.

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