Two rival BDCs, Capital Southwest and Main Street Capital, unveiled an $85 million joint venture today that will invest in senior loans of upper middle market companies.
The fund will have initial capital commitments of $68 million from Capital Southwest and $17 million from Main Street.
Capital Southwest will own 80% of the fund, called I-45 SLF, and share in 75.6% of profits. Main Street will own 20%, and have a profits interest of 24.4%.
Main Street and Capital Southwest expect to begin funding loans for the new joint venture this month. A board with two members each from Main Street and Capital Southwest will make investment decisions.
Capital Southwest’s board representation will be Bowen Diehl, Capital Southwest's chief investment officer who joined the company last year, as well as Josh Weinstein, principal on the investment team who joined from H.I.G. WhiteHorse in June.
Main Street will be represented by Nick Meserve, and another yet to be named. Meserve is managing director of the middle market investment team at Main Street.
The fund is expected to obtain a senior credit facility allowing for leverage of up to 2x debt-to-equity.
“This joint venture gives us immediate access to [Main Street’s] strong established syndicated senior loan origination platform, while leveraging our joint credit expertise in producing attractive risk-adjusted returns,” said Diehl.
“Our investment in I-45 SLF allocates a portion of our capital base to upper middle market syndicated senior secured loans, complementing our lower middle market origination efforts and advancing our investment strategy towards the goal of creating a granular and diversified credit portfolio.”
Capital Southwest is undergoing a transformation that includes a spin-off that will create two publicly traded entities: an internally managed BDC that will lend to middle market companies and retain the Capital Southwest name, and a diversified growth company to be called CSW Industrials. Shareholders of Capital Southwest will receive shares in CSW Industrials as a tax-free dividend.
Diehl is set to become chief executive officer of Capital Southwest after the spin-off of CSW Industrials.
Traditionally, Capital Southwest has invested in equity. However, for about six months, Capital Southwest has been lending to the lower middle market, but has not been an active lender to the upper swath of the market. In a 10-Q last month, Capital Southwest said future investments would target debt of middle market companies, sponsored and non-sponsored.
For Main Street, the fund will target investments that are more or less in line with its current investment strategy, with a focus on the upper end.
Houston-based Main Street provides long-term debt and equity capital to lower middle market companies and debt capital to middle market companies. The business-development company trades on the NYSE under the ticker MAIN.
Shares of Dallas-based Capital Southwest trade on Nasdaq under the ticker symbol CSWC.