Man Group struck a deal to buy a controlling interest in New York-based private credit manager Varagon Capital Partners, which specializes in U.S. middle market lending.
It is the second majority stake purchase by the firm in the past week, with Man also acquiring a 51% controlling stake in Geneva-based Asteria, a boutique ESG-oriented fund manager.
This latest transaction was described as part of U.K.-based Man Group’s strategic ambitions to expand into the U.S. Meanwhile for Varagon, the deal provides access to global distribution via the London-based alternative investment giant Man.
For Man Group, Varagon’s experienced management team and client base that has a particular emphasis on the insurance channel bring significant institutional credibility to support Man Group’s growth in U.S. private credit. The acquisition will enhance Man Group’s investment capabilities, equipping the firm with a complementary U.S.-focused direct lending strategy. More importantly, Varagon brings the ability to deploy these investment capabilities at scale in a customizable format to the world’s largest institutional investors.
“We are thrilled to have Varagon join Man Group as an additional investment engine,” said Robyn Grew, incoming CEO at Man Group. “This acquisition is indicative of our commitment to diversifying our client offering and our strategic expansion ambitions in the U.S. Varagon has built a high-quality investment platform and shares our vision to deliver outperformance for clients. Our extensive distribution network and operational expertise will support Varagon with its continued growth and delivery for clients, and we very much look forward to working with such a strong team.”
With $11.8 billion in assets under management as of year-end 2022, Varagon is focused on senior secured loans with multiple covenants to cash generative, high-performing sponsor-backed companies in non-cyclical industries. Typically, the firm will be a lead or co-lead lender as the team has the origination capabilities to support enhanced terms and differentiated terms for investors across a range of investment vehicles from SMAs, private funds and rated note products.
This deal follows Goldman Sachs Asset Management’s strategic preferred equity investment in Varagon completed last year. That transaction, which was not a stake in the GP, was to support the launch of new investment vehicles. Since its 2014 inception, Varagon has completed $24.5 billion of financings to over 300 companies and 138 sponsors.
Upon completion of the transaction, Walter Owens, CEO of Varagon, will continue to manage the Varagon business, supported by its existing 88 team members across offices in New York, Fort Worth and Chicago. Varagon’s investment committee, investment team and investment processes will remain unchanged.
“We are excited to be joining Man Group, a world-class investment firm with global distribution capabilities, a strong brand and infrastructure, and a like-minded, collaborative culture,” said Varagon’s Owens. “Man Group’s deep experience building bespoke solutions for clients and best-in-class technology will help us to better serve our clients and further reinforce our position as a differentiated capital solutions provider in the core middle market.”
The deal comes at a time of rapid growth of the private markets broadly. According to figures from Rothschild and Co. cited by Varagon, the U.S. middle market is one of the world’s largest, with over 200,000 middle market companies generating one third of U.S. private sector GDP.
“We believe a combination of Man Group and Varagon will enable us to preserve our proven investment process while helping us scale our suite of products and continue to deliver compelling results to our clients and sponsor partners,” Owens added.
According to Man Group’s Head of Discretionary Eric Burl, the acquisition reflects a long-term strategy of moving into new market segments where the firm can differentiate itself with specialized teams. “Man Group has built a rich and diversified credit offering to date, and as client demand for credit strategies is increasing, we see a significant growth opportunity in direct lending, particularly against the backdrop of regional banking difficulties in the U.S.,” Burl said.
The transaction, which is subject to regulatory approvals, is expected to close sometime in the third quarter.
The $145 billion Man Group will pay $183 million in cash to selling interest holders — Aflac Inc, Corebridge Financial, AIG and former members of Varagon’s management team. Aflac, Corebridge and AIG, which account for half of Varagon’s $15.4 billion in client commitments, have agreed to continue their existing multi-year investment management agreements. Subject to the groups maintaining a pre-determined level of capital commitments over a nine-year period, extension payments of up to $93 million will be paid in cash to all three firms.
The Varagon management team will roll all of its existing 27% interest into a structure that ensures a long-term alignment with the combined business. In turn, Man Group and management will have a reciprocal put/call option over the residual stake at fair market value in years eight, nine and 10 – subject to certain conditions.
According to audited accounts of Varagon, the firm is said to have delivered AUM growth of 13% over three years to Dec. 31, 2022. Profit before tax was $30.9 million. Man Group said it expects the transaction to be meaningfully accretive to management fee and earnings per share in the first full year following completion of the deal.
Wells Fargo Securities is acting as lead financial advisor and Willkie Farr & Gallagher LLP is acting as legal advisor to Man Group and/or its U.S. affiliates. Rothschild & Co. Inc. is acting as lead financial advisor and Davis Polk & Wardwell LLP is acting as legal advisor to Varagon.