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November 2022

Penfund: Deploying Capital Amidst Volatility

Current credit market conditions are challenging for borrowers. The primary issuance market is in a period of price and term discovery, which makes it difficult to confidently launch new transactions. The cost of debt and leverage levels have adjusted much more quickly than equity valuations, which has impaired the economics of many buyout transactions. LBO volumes have therefore declined amidst uncertain market and macro conditions and as sponsors and lenders adjust to a new environment.

For the first time in years, not all lenders are open for business and hold limits are decreasing rather than growing. In today’s market, a lender’s sources of capital, funding model and investment strategy all have a pronounced impact on its ability to make debt capital available to its clients. In many cases what a lender could offer six months ago bears little resemblance to what it can offer today. In this environment sponsors need to carefully consider the ability of a lender to firmly commit capital in a workable timeline.

Penfund is funded entirely with committed capital that is managed at our discretion. Our ability to fund transactions is therefore independent from broader market conditions. We specialize in providing junior capital and only junior capital. As such, we are always ready to invest in companies aligned with our strategy and have a history of doing so in times of heightened volatility. With the ability to hold up to US$250 million per transaction, we can be a meaningful financing partner to borrowers and sponsors within our coverage universe.

In today’s market, our second-lien loan offering has a particularly compelling value proposition to borrowers:

Up to US$250 million per investment: Our hold size and interest in deploying capital have not changed and do not vary with market conditions. We underwrite and hold entire tranches or large participations in second lien credit facilities.

Flexible structures: We can offer PIK features, delayed-draw, customized payment periods and other situation and borrower-specific features that can provide sponsors with additional flexibility and margin of safety in uncertain times.

A diversified capital structure: Generally, but especially during times of volatility, diversity in a borrower’s capital structure is beneficial. A second-lien tranche reduces reliance on a single debt financing tranche that would otherwise be present in a unitranche or stretch senior facility. This can be very useful in challenging market conditions.

Optimized cost of debt: Bifurcated capital structures typically have lower blended pricing than unitranche facilities at the outset of an LBO. In addition, as the base business grows organically and through acquisition, a bifurcated capital structure enables borrowers to first exhaust incremental first lien debt capacity before incurring additional second lien debt, and in doing so, drive down the blended cost of debt financing. With tuck-in M&A multiples declining, a bifurcated capital structure heightens this cost advantage.

Active in every market: Our sole product is junior capital. We are active second-lien investors in every environment. We have been consistent and constructive financing partners through periods of heightened market volatility. We actively deployed capital throughout COVID-induced periods of market choppiness and have recently provided follow-on financing to portfolio companies. Our strategy is not driven by macro or market conditions, nor is our available capital.

We have been and remain consistently open for business. Please do not hesitate to reach out to any member of the Penfund team to discuss financing solutions we can offer.  

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About Penfund

Penfund is a leading provider of capital to middle market companies throughout North America. The firm is actively investing both senior and junior capital through Penfund Prime and Penfund Capital Fund VII. Penfund manages funds sourced from pension funds, insurance companies, banks, family offices and high-net-worth individuals located in Canada, the United States, the Middle East, and Europe. Penfund has invested more than C$3.0 billion in over 225 companies since its establishment. Assets under management are approximately C$3.0 billion.

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