Mezzanine Funds Are in Demand
At a time when many banks have shut their doors to borrowers, companies—even highly profitable ones—have been forced to look elsewhere for capital. Many have turned to mezzanine funds to finance their businesses. Mezzanine funds, which focus on businesses’ cash flow and growth potential, have been willing to provide promising companies with capital and help them grow despite the credit crises.
A New York City-based mezzanine provider recently funded a company that gives financial assistance to small businesses. Due to the credit crisis, this business was thriving. Nevertheless, a local bank turned down its loan request because the company did not have enough collateral. The mezzanine provider, on the other hand, saw potential growth and provided $4 million in funding.
Savvy mezzanine funds are evaluating the numerous opportunities left in the wake of the financial crises and investors have noticed. During the past three weeks, BHA analysts have seen an increasing number of investors expressing interest in mezzanine funds. More than 30 percent of all private equity fund investors BHA interviewed were opportunistic when asked about mezzanine funds.
Some investors believe that current prospects are good for funds to produce solid returns. A small wealth advisory firm located in Ohio thinks that the domestic market in particular is ripe with opportunities. It is searching for funds with longer-term investment horizons.
Other investors anticipate demand for mezzanine funding increasing in the near future, specifically in Asia. An investor based in New Zealand mentioned he is watching Asian mezzanine funds as he expects an Asian credit crisis to emerge next year. An economist attending the World Economic Forum seems to concur, noting “massive rises in house prices in Beijing and Shanghai in China over the past year” and warning of “renewed bubbles in financial asset prices and real estate.1 Some believe the crisis may peak between 2011 and 2013.
Not surprisingly, mezzanine investors have indicated the need for experienced fund managers. A large government pension plan noted that it requires mezzanine fund managers to have managed at least two funds prior. This is a lesson many investors learned from their real estate investments. Some mezzanine funds that sponsored real estate developers were overleveraged and miscalculated landlords’ potential income. In the end, the funds had to sell the debt at a steep discount, which caused significant losses in the funds.
If the lending crisis continues, mezzanine funds will have opportunities to thrive. Experienced managers that know how to choose the right companies will be able to capitalize on this need for financing to the benefit of fund investors.
1 The Wall Street Journal, “WEF Flags Risks of Fiscal Crisis, Bubbles and Chinese Economy,” January 14, 2010.