First Eagle Raises $782 Million for Latest Direct Lending Fund

(Bloomberg) -- First Eagle Investment Management’s alternative credit unit has closed its fourth fund that makes loans to middle-market companies, extending its bet on the booming asset class.

The vehicle, THL Credit Direct Lending Fund IV, has $782 million of available investment capacity, including leverage, First Eagle said in a statement. The fund will focus on providing senior secured loans to mostly private equity-backed companies with $10 million to $40 million in Ebitda (earnings before interest, taxes, depreciation and amortization). First Eagle considers those companies the core part of the middle market.

The fundraising news comes about two months after First Eagle announced it planned to acquire THL Credit Advisors, forming a $23 billion unit that originates new loans and buys existing debt.

“Traditionally direct lending can generate an 8-10% return, with about a 50% loan-to-value, downside protection and with minimal volatility,” Chris Flynn, president of First Eagle Alternative Credit, said in a phone interview. “And when folks are looking for yield in a relative low-yield environment, it’s a good place to be.”

Flynn said First Eagle is sticking with the core part of the market in part because there’s less competition than for larger transactions and also because they generally come with stronger lender protections.

Buy and Hold

“There’s plenty of competition, but the main difference between the core middle market and the upper middle market is that in the core middle market you’re competing against other direct lenders who buy and hold,” he said. “When you move above $40 million to $50 million in Ebitda, you’re competing against the large direct lenders and the underwrite-and-distribute model.” Those transactions, he said, are often so-called covenant-lite loans that carry weaker protections.

THL’s previous fund, THL Credit Direct Lending Fund III, raised $511 million in 2017 and also focused on loans to private equity-backed, mid-sized companies.

First Eagle’s fund close comes as investors continue to stream into direct lending strategies, even if inflows have eased from their peak. North America-focused private-credit funds raised $25.1 billion last year, down from $26.4 billion in 2018, according to London-based research firm Preqin.

First Eagle Investment Management had $101 billion in assets under management as of Dec. 31.

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