Goldman and Garrison in Middle Market

Chidem Kurdas

Lending to middle-market companies has been a sweet spot in credit. Capital is scarce in this market segment, so lenders can charge robust rates without taking much risk. No surprise that the market attracts new loan businesses, notably the Goldman Sachs Business Development Company that went public this March.

The Goldman BDC has a strategy substantially similar to other BDCs, among them Garrison Capital, which was taken public in 2013 by Garrison Investment Group, a $4.1 billion hedge fund manager. Garrison Group chief Joseph Tansey, a former managing director of Fortress Investment Group and partner in Fortress’ Drawbridge Special Opportunities Fund, also runs the BDC.

While the Goldman BDC pursues the same lending opportunities as other BDCs, it has an advantage in raising money thanks to the parent bank’s connections and brand name. As of the end of 2014, it already had made debt and equity investments worth $1.27 billion, having privately raised capital in the two years prior to the IPO. Garrison’s portfolio is less than half of that at $467.8 million.

Is the niche getting too crowded? That’s a question some credit investors ask.

The middle market was seen as a land of opportunity in the aftermath of the credit crisis because new regulatory restrictions in effect clamped down on conventional bank loans to mid-sized and smaller businesses.

But competition for lending opportunities is heating up as more capital enters—especially with Goldman bringing in big investors.

There has been “a slight narrowing of middle-market spreads since 2013 as these companies enter the lower middle-market in search of enhanced yields,” according to a comment from Garrison. Increasing competition could further compress spreads, though Garrison says the scarcity of capital continues.

In the meantime, “club” deals involving multiple lenders have no trouble drawing participants.

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