| Mezzanine Fund 101 |
|
|
| 23/01/2005 | |
|
Rolf Nuijens and Adam Hayes-Newington of Intermediate Capital Group PLC answer this week's 101 on Mezzanine Fund. 1-What is a Mezzanine Fund? A Mezzanine fund is a fixed life investment vehicle, often a limited partnership, to which investors commit capital. Funds are managed by a specialist investment manager, who will be responsible for investing in mezzanine opportunities. Mezzanine is subordinated debt financing which sits between equity and senior debt (bank loans) in the capital structure of a company and which is predominantly used in [leveraged] buyouts, alongside a private equity or other institutional investor. Mezzanine loans typically have a cash coupon which will generate a cash payout to the fund investors, as well as rolled up interest (normally paid at the end of the investment) and traditionally, an equity interest in the form of warrants. The components of risk and return and the cashflow profile of a mezzanine fund, amongst other factors, make it a substantially different investment to a private equity fund. A mezzanine fund manager will charge investors a fixed annual management fee and a performance related fee at the end of the life of the fund (typically after 10 years). 2-What are the objectives of such a strategy for an institutional investor? How much should be allocated to this asset class? An investor in mezzanine recognises the fact that it is an investment which generates attractive returns with a given level of risk and has the additional benefit of enhancing portfolio diversity. A private equity fund, due to the relative position of its underlying investments in the capital structure, can generate higher returns than a mezzanine fund, but equally carries a higher level of risk. In addition to the appeal of the cash paying element of mezzanine loans, it is an asset class which is attractive to institutional investors who are seeking higher yields, but who understand the need to layer risk in their debt portfolio. Mezzanine is therefore an alternative/additional investment for any investor who allocates part of their portfolio to private equity or indeed for investors looking for additional alpha for their debt portfolio from a diversified range of asset classes. The allocation to mezzanine will depend on all of the usual individual factors, such as funding level, understanding, timeframe, cost and risk budget. 3-Why are Continental European investors rather slow to invest in this asset class? What about UK investors? Mezzanine is still a relatively immature asset class for institutional investors throughout Europe, although demand from Continental Europe has been considerably stronger than from the UK. This situation has been, at least in part, due to a lack of dedicated mezzanine funds which are open to a wider range of institutional investors, the establishment of such funds being a direct result of the strong growth in the European mezzanine market of the last five years. Historically institutional investors have tended to allocate assets to the private equity segment first, which is perhaps understandable given the higher profile and relative maturity of private equity as an asset class. Whilst pressure has grown on institutions to increase private equity exposure, the reality is that to-date the level of actual investment has not yet seen significant growth. Experience suggests that once investors have gained sufficient familiarity with private equity investments (typically in equity funds), they are then more comfortable with looking at other 'associated' asset classes. |
|
Related articles |
|
Articles of the same Serie : 101 |
|
© Copyright 2008 bfinance. This document is for your personal non-commercial use. Any further copying, reproduction, distribution is strictly prohibited. To obtain permission please contact This e-mail address is being protected from spam bots, you need JavaScript enabled to view it