Chicago’s reputation as a world-class business and financial center has largely derived from its historic manufacturing base, its service as the nation’s transportation hub and its prominence in commodities and financial futures and options trading markets. More recently, however, and with little fanfare, Chicago has emerged as the national epicenter of middle-market M&A transaction financing.
This region will long struggle to compete with New York in the sheer volume of capital under management and in the number and variety of capital providers. However, Chicago boasts the most complete source of financing alternatives in the country for leveraged buyouts (LBOs) and leveraged recapitalizations (recaps) of middle-market companies — companies with enterprise values of between $25 million and $250 million — which, over the last two decades, has become a gigantic industry.
Chicago distinguishes itself from other financial hubs in that it is the chosen home of an important and growing group of nonbank commercial lenders that primarily provide cash flow loans to finance LBOs and recaps across the country. As a result, buyout firms and other deal-makers from all over the country have been turning to Chicago’s specialized lenders to finance their deals.
Why Chicago? In addition to its centralized location, Chicago has perhaps the largest talent pool anywhere of professionals trained in originating and underwriting loans for middle market LBOs and recaps. The concept of cash flow lending — making loans based upon a company’s historic and projected cash flows and its intrinsic market value, rather than on the collateral value of its assets — was originally perfected by Heller Financial, an old-line Chicago-based commercial lender that was acquired by General Electric Capital Corp. in 2001.
Executives from Heller’s original cash flow lending group have since spawned about a half dozen new independent commercial lenders, all headquartered in Chicago or with major operations here. These new financing sources provide critical financing for the hundreds of private equity investment firms and deal-makers throughout the country that sponsor LBOs and recaps. In fact, it is rare today for a U.S. deal-maker to arrange financing for a middle-market acquisition without trying to work with one or more of Chicago’s specialized lenders.
The new cadre of firms formed around ex-Heller executives includes Antares Capital (formed in 1996 with backing from MassMutual); Merrill Lynch Capital (formed in 2002 by Merrill Lynch); Dymas Capital (formed in 2002 with backing from Cerberus, one the country’s largest hedge funds); and Capital Source (which went public in 2004, after being formed in 2000 with backing from another large hedge fund, Farallon Capital, and Chicago’s largest private equity fund, Madison Dearborn Partners).
Madison Capital (formed by senior bankers from the Chicago offices of Bank of America and Bank One in 2001, with backing from New York Life) is another new Chicago-based commercial lender with a similar focus on financing LBOs and recaps throughout the United States. And even GE Capital, which, after acquiring Heller, became the largest middle-market cash flow lender in the country, continues to maintain its largest cash flow lending operations in Chicago.
Many other Chicago institutions, including large hedge funds and global investment firms, have also recently formed new specialized lending groups headquartered in Chicago.
Indeed, Chicago today is the most dynamic one-stop shop for middle-market financing in the country. Besides the new breed of cash flow lenders, the city is home to numerous local and regional commercial banks, several larger banking institutions such as LaSalle Bank N.A., Northern Trust Co. and Harris Bank, and major operations of other large national banks and more than 60 foreign banks. Chicago is also home to a large and growing number of mezzanine (i.e., subordinated debt) investors, who often provide a critical component of a leveraged transaction capital structure, bridging the gap between debt and equity.
Finally, Chicago claims nearly 100 private equity and venture capital firms, with approximately $43 billion in capital collectively under management. Together, these financing institutions have put Chicago squarely on the map for the myriad deal-makers across the country that buy and sell middle-market companies, further solidifying the city’s reputation as a world-class business and financial center. Scott H. Lang is senior managing director and principal of Brown Gibbons Lang & Co. Lang is co-head of the firm and manages its growing Chicago operations, where he plays an active senior role in client engagements and business development. Reach him at (312) 658-1600 or [email protected]. Michael Shaffer is an associate at Brown Gibbons Lang & Co. Reach him at (312) 658-1600 or [email protected].
