Canadian pension fund equity injection may be end game for Brookfield’s La Trobe Financial

La Trobe Financial generates most of its earnings from fees for lending money to homebuyers who cannot get loans from a traditional bank. Picture: Gaye Gerard

Private equity firm Brookfield could opt for a partial sale of its mortgages business La Trobe Financial rather than a full divestment if bidders do not pay up say sources.

It comes ahead of first round bids due on Friday July 31, with talk that Canadian pension funds are among the parties interested in the business but only for a portion of the company.

The funds would require Brookfield to stay on as manager or need to form a consortium with another bidder, but market experts believe that they could make an investment that sees them buy about 40 per cent.

Brookfield sources would not comment on the possible outcome, other than to say while a trade sale remained the preference, nothing could be ruled out.

Such an outcome may solve a dilemma for Brookfield if offers come in for all of the business below expectations.

If a pension fund was prepared to pay up, even if they would not buy all of the company, it would maintain La Trobe’s valuation while also allowing Brookfield investors to take some money off the table.

As earlier reported by DataRoom, Canadian pension funds Ontario Teachers Pension Plan and CDPQ are weighing a purchase of La Trobe Financial, and at least one of the groups is believed to be running hard at the business.

Such groups are known to pay up for assets.

In terms of the other groups looking, it’s now understood that a European private equity firm may be a newcomer that is entering the auction.

Warburg Pincus, advised by Goldman Sachs, and CVC Capital, advised by Deutsche Bank, so far are the only two private equity firms known to have hired investment banks to advise on buying the business.

Kohlberg Kravis Roberts had been looking, while Bain Capital was undecided whether it would pursue the opportunity, and the Australian listed Challenger looked earlier but walked away.

Sixth Street has also been taking a look.

So far, Warburg Pincus and CVC are seen as the strongest contenders for the business that makes most of its money from offering loans to home buyers that cannot get debt from a bank for the purchase, but Warburg Pincus has cooled on the opportunity and there are doubts the groups would meet Brookfield’s $3bn-plus price expectations.

La Trobe Financial chief executive Chris Andrews.

Valuation debate

There’s plenty of debate in the market about the business when it comes to price – many are arguing that its valuation is closer to $2.3bn, despite La Trobe being one of the best performers in the private credit industry.

Bidders may make about 10 per cent of their offers subject to an earn out.

But Brookfield’s ambitions to get top dollar centre on its argument that the company differs from its rivals in that it is a fund manager rather than a non-bank lender.

The case is based on the reclassification in the past years of the earnings it receives from lending out funds at a higher rate than what it pays to retail investors in the funds as “fee-related earnings”, such as performance, fixed and transaction fees.

A bank or a non-bank lender would call the money they make on their loans the net interest margin, being the difference between the costs of funds and portfolio yields.

The other difference, the company argues, is that because it receives the majority of the funding for the loans from retail investors rather than warehouse facilities that rely on broader financial system, that makes it a fund manager as well.

Non-bank lenders and banks need to contribute about 10 per cent of capital, unlike La Trobe Financial, which compares itself to groups in the market like Metrics Credit, MA Financial and Qualitas.

Its claim is that 80 per cent of its income is from “fee-related earnings”.

Of the $21bn it has under management, $14bn is from investors in its La Trobe Credit Fund, although the remaining $7bn is sourced from its own warehouse facilities – non-bank lenders have warehouse facilities.

Some industry experts remain sceptical of the difference, given that most of the funds Brookfield manages are from mortgages.

The difference is important to Brookfield, because fund managers command much higher prices than non-bank lenders -14 to 22 times earnings rather than eight to nine times.

The group also claims its stellar earnings growth track record of growing from $14bn in 2022 to $20bn can be maintained and hopes to grow from $20bn to $50bn of funds managed in five years, despite many questioning, as a mature business, whether that is in fact the case.

The industry has become increasingly competitive and there’s a view that La Trobe’s growth has been limited in the past year.

DataRoom understands that in the first phase of the contest, Brookfield, advised by Morgan Stanley, which was initially brought in to focus on an initial public offering if that was pursued, and UBS, had about 20 parties that have been provided with early-stage due diligence material.

Brookfield purchased the business in 2022 for $1.5bn from Blackstone, which dropped the price after commanding a far higher amount before the sale.

Final bids are due around September for the business that lends no more than $50m to any one customer.

Earnings before interest, tax, depreciation and amortisation is currently at $320m per annum, up from about $200m in 2022.

One of the most impressive factors about La Trobe over time has been the quality and experience of its underwriting team, consisting mostly of former bankers.

But the private credit industry as a whole is coming under increasing scrutiny from regulators.