(Bloomberg) — American International Group Inc., the largest property-casualty insurer in the U.S. and Canada, joined private-equity firm Oak Hill Capital Management to help start a lender serving medium-sized companies.

AIG has committed $1.5 billion to Varagon Capital Partners, the companies said in a statement today. The venture will be led by Chief Executive Officer Walter Owens, who previously worked at GE Capital and CIT Group Inc.

Institutional investors have been seeking to diversify holdings beyond bonds with interest rates near record lows. Many have added loans to so-called middle-market companies to boost yields.

In addition to insurers, “pension funds, family offices and endowments that have become investors in middle-market credit are looking to take the next step,” Owens said in a phone interview. They’re “really perfect candidates to be talking with us.”

Competition has intensified as more investors pour capital into commercial lenders. That prompted the Federal Reserve to report in April that underwriting standards are deteriorating. Commercial and industrial loans rose at a seasonally adjusted annual rate of more than 12 percent, the fastest of any loan category in a tally by the central bank published last week.

Varagon said its offerings will include first-lien and mezzanine financing and be backed by “robust risk management.” The New York-based company will focus on borrowers with $10 million to $75 million of earnings before interest, tax, depreciation and amortization.

Nayden, Schreiber

Loans will be for as much as $350 million, according to the statement. AIG plans to hold $20 million to $100 million of a typical transaction and syndicate the rest to other investors, Jon Diat, a spokesman for the insurer, said in an e-mail.

Varagon’s chairman is Denis Nayden, a managing partner of Oak Hill and former chairman and CEO of GE Capital. The board includes Brian Schreiber, a deputy chief investment officer at New York-based AIG; Michael Gaudino, former CEO of GE Corporate Financial Services; and Morris Offit, chairman of Offit Capital and a former AIG director.

“The board is going to be very helpful in setting strategic direction and providing us with value in building and scaling the business,” Owens said.

Oak Hill manages funds with more than $8 billion of initial capital commitments. Partners and affiliates of the firm joined AIG in backing Varagon, according to the statement.

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