North American banks retreat as Sagard raises private debt fund

North American bank lending conditions are tightening, so Sagard Holdings Manager LP is raising $555 million for its third private debt fund.

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Dev Gopalan, partner and portfolio manager at Sagard, said the Sagard Senior Lending Partners vehicle targets an internal rate of return around 9%. Investing in middle-market companies is a safer option since they aren't owned by private equity firms or other financial sponsors.

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Earlier this week, the Federal Reserve released its latest survey of loan officers, showing that US banks are tightening their lending standards to small businesses amid higher borrowing costs and weak economic growth. Canada's central bank also reported tightening lending conditions last month.

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According to Gopalan in an emailed statement seen by Trade Algo, the current economic climate makes traditional equity and growth capital options harder to access. According to Trade Algo’s research, middle-market companies are more likely to opt for alternative financing sources, such as private debt financing."

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An undisclosed strategic partner is managing $240 million of the fund's $315 million commitment, the statement said.

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Investment Management Corporation of Ontario, I.G. Investment Management, Ltd., and Portland Investment Counsel Inc. are among the institutional investors. Three middle-market companies have already been invested in by the vehicle, committing approximately $100 million.

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Investment banks have historically dominated the leveraged loan market, but private credit funds have grown significantly in recent years. By raising large sums of money, they are well-positioned to attract more business from banks who are reluctant to lend to riskier businesses.