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PGIM to avoid buyout finance in big bet on direct lending market

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Asset manager PGIM Inc. is looking to at least triple its investments in the growing direct lending market where it wants to compete with banks to fund mid-size companies outside of the buyout space.

PGIM Private Capital’s direct lending team is targeting about $1 billion to $1.5 billion in volume annually, up from about $300 million per year about three years ago, according to Jeffrey Dickson, executive managing director and head of alternatives.

“We’re really replacing banks and helping to finance non-buyout activities like a company building a new plant or passing along a company from one generation to another,” Dickson said in a phone interview. “It’s old fashioned lending.”

The firm is steering clear of financing to private equity-backed companies, a big part of the $800 billion private credit landscape. Instead, it relies on its network of 14 regional offices to unearth deals it says have better protections with still juicy yields.

“While we’re not adverse to the buyout market by any means, we just see PE price multiples so high and so much money chasing deals that we find better opportunities outside of it,” Dickson said.

The firm is able to get “8-9% yields with leverage at 3-3.5 times with all the protections,” in the non-sponsored space, which makes up about 60% of its private credit deal flow, Dickson said.

PGIM Private Capital, which managed a portfolio of $94 billion as of Dec. 31, began building out its direct lending team about four years ago, following internal interest from other managers at the firm and from large institutional investors looking to pursue separate managed account opportunities. The group, led by Matthew Harvey, now has an eight person investment committee, and the team could grow to 20 to 25 people over time, Dickson said.

The team focuses on borrowers with $25 million to $30 million in earnings before taxes, interest, depreciation and amortization, with the average size of its financings in the $30 million to $50 million range.

The firm also has a dedicated workout team it says it can tap into if and when cracks emerge in its portfolio. “We’re not ones to cut and run, and sell the paper into the distress market,” Dickson said.

Bloomberg News
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