Audax Group Moves Into Mezzanine –

One year in the making, The Audax Group is bringing its third private equity fund to market to tackle the plethora of opportunities in middle-market mezzanine financing. Audax Mezzanine Fund LP, which will be based in the firm’s New York office, was formally launched this month and is expecting to see a first close in the fourth quarter of this year.

Co-Chief Executive Officers Marc Wolpow and Geoff Rehnert, the two renegade managing directors from Bain Capital who established Audax last year, will provide strategic oversight to the fund and sit on the fund’s investment committee. Kevin Magid, will run the fund on a day-to-day basis. The team, which also includes Peter Gummeson and Geoff Chang, has already earned the attention of limited partners such as the California Public Employees’ Retirement System (CalPERS), which committed $100 million to the fund.

Wolpow, who will be spending a large portion of his time on the Audax Mezzanine Fund, oversaw the mezzanine fund at Bain Capital, where he established Sankaty Advisors Inc., a Bain affiliate that invests in bank debt, high yield bonds, mezzanine loans and special situations.

Magid and Gummeson, managing directors at Audax, hail from CIBC World Markets and Albion Alliance, respectively. Magid was a managing director in the Leveraged Finance and Merchant Banking Group at CIBC, where he raised bank debt, high yield debt and mezzanine financing for companies and private equity sponsors. Chang worked closely with Magid at CIBC, before joining the Audax Group in March.

Gummeson is formerly a senior vice president and principal of Albion Alliance, the mezzanine and private equity fund affiliate of Alliance Capital Management LP.

The team will likely grow to six to 10 professionals depending on the size of the fund, Magid says.

Showing Promise

In an April interview, Rehnert expected the mezzanine fund to target $250 million, but with slightly over $100 million secured prior to the formal launch, the target is now $350 million (BUYOUTS, April 17, p. 40).

The Audax Group plans to invest in approximately 20 deals from the fund, says Magid. And while the typical investment size will depend upon the total sum garnered for the fund, it is expected to be in the $15 million to $40 million range.

The fund will act foremost as a third party mezzanine fund. Therefore, it will not invest more than 25% of the fund in Audax private equity deals and will not take a majority position in those mezzanine financings in order to avoid any potential conflicts of interest with the firm’s other funds.

The Master Plan

The Audax fund is making a timely entrance into the market as mezzanine funds in the middle market have been very active in recent months due to a tightening bank market and the ever-increasing number and size of private equity funds raised relative to the amount of mezzanine (BUYOUTS July 21, p. 1).

However, Magid promises this is not a passing fad for the Audax Group. “This is absolutely one of the five core areas that Audax Group plans to be in for the long term,” says Magid.

The firm will stay in the middle market sector, steering clear of the mezzanine mega-funds that have sprouted up over the past year, such as the $1.1 billion Blackstone Mezzanine Partners LP and the $850 million TCW/Crescent Mezzanine Partners III LP.

“Our focus is the middle market and Audax’s strengths are in the middle market,” says Magid. “I think that’s where we can generate excess returns for our LPs based on the different middle market relationships the folks at the firm have . . . I think that’s where we have a competitive advantage.”

The fund will employ a flexible fund strategy that will allow it to invest “below high yield bonds, but above control common equity,” says Magid.

“We can be good financing partners for both companies and buyout shops because we don’t really have serious restrictions on the types of deals we have to do,” he says. “And I think as a group, Peter and myself, as well as our team, bring the skills to the table that allow us to execute those transactions.”

All in the Family

From the outset, the firm expected that the positioning of the mezzanine fun in the Audax platform, like that of its other funds, would generate deal flow beyond that deriving from marketing. So far, that strategy is holding true.

Although the mezzanine fund has not yet made any investments, fund managers have already seen a fair bit of deal flow, says Magid.

The fund will begin making investments after the first close.

The Audax Group’s family of funds also includes a $500 million private equity fund that closed earlier this year and a $75 million venture capital fund.

Rounding out the family of funds and the five core areas of the firm, will be a collateralized debt obligation (CDO) fund and a public equities hedge fund, expected to come to market in 2001.