Mezzanine Funds Fill the Gaps
The recent economic turmoil brought with it a host of difficulties for small and mid-market companies. Chief among these challenges was access to capital. Companies found it hard—and sometimes impossible—to secure bank loans for expansion or restructuring.
Despite the improving economy, many companies are still hard-pressed to find funding and therefore are seeking mezzanine financing to fill the gap. From Florida to Wales, private equity funds are surfacing to address this demand. 1, 2
Many see private equity’s help as key to the future. Bill McCollumn, Florida’s Attorney General, recently stated that mezzanine funding “can play a crucial role in helping the state’s young companies grow and diversify the state’s economy.” Others see such funding as a way to create jobs in an economy that is in dire need of additional employment opportunities.
Institutional investors that have not had exposure to the mezzanine space see opportunity in private equity’s funding of small- and mid-market businesses. Comparing data from the first quarter with results from the fourth quarter, BHA saw an increase of more than 50 percent in the number of investors interested in mezzanine funds.
One of the main players in this expanding market is government pension plans. Public pensions have always been significant players in private equity buyout funds, but now they are moving into the mezzanine space as well. This month, more than 40 percent of investors interested in mezzanine funds were government pensions.
The mixture of debt and equity that usually comprises mezzanine investments is attractive to pensions because, as the Minnesota Center for Public Finance Research notes, the steady interest payments from the debt component act as a hedge against risk while the equity portion allows for further gains from company growth.3
Many pension plans’ requirements for managers’ track records, assets under management, and fund size varied. However, one specification was almost completely consistent across the board: more than 90 percent of investors were interested in small- and mid-market-focused funds. Apparently, investors are aware of the opportunities that can be found in this space, where traditional bank loans are no longer the standard avenue for access to new capital.
1 WalesOnline, “Call for funding to fill gap welcomed by Government,” November 24, 2009.
2 South Florida Business Journal, “South Florida companies benefit from new $450M mezz fund,” March 11, 2010.
3 Minnesota Center for Public Finance Research, “Public Pensions in Minnesota: Re-Definable Benefits and Under-Reported Performance, May 2006.