BBH Amasses $377M On Mezz Fund II –

After a lackluster first quarter, the mezzanine market got busy beginning in April this year. And it is about to get a whole lot busier for New York-based investment bank Brown Brothers Harriman (BBH).

BBH has just closed the 1818 Mezzanine Fund II L.P., its second mezzanine fund and part of the 1818 Family of Funds, with commitments of $377 million.

“It’s going to be a very busy fall,” said Bob Gould, a partner at the firm.

Although the fund’s original target was $400 million, Gould says he does not feel discouraged by coming in just under the goal.

“The fund gives us flexibility. It enables us to do exactly what we want to do. We think it’s the right spot for an independent fund,” he said.

Gould is co-manager of the fund, along with Joe Donlan, who is also a managing director.

The 1818 Mezzanine Fund II L.P. is a partnership formed to invest in privately negotiated subordinated debt and equity securities of small- to mid-sized companies. Gould expects his firm to invest on average $15 million to $20 million per deal. The predecessor fund, the 1818 Mezzanine Fund L.P., was formed in 1997 with total capital commitments of $250 million. Through it, the firm has made 17 investments, and has now invested more than 95% of its capital.

Fund II’s structure employs the traditional 80/20 split, and there is an 8% hurdle rate, said Gould, who anticipates “better than 20%” IRR on investments for the new fund. Fund I’s IRR was in excess of 38% on its fully realized investments. The fund seeks to invest in both sponsored and non-sponsored transactions, including management or leveraged buyouts, recapitalizations, acquisitions, and expansions.

The fund was launched in May of 2000 and held its first close in February of this year on $182 million. Gould said the fund was really closed in April or May this year, but that the firm was collecting subscription agreements from international investors until more recently.

Gould declined to name any of the limited partners, but said contributors consisted of the firm’s usual mix: one quarter U.S. pension funds; one quarter domestic insurance companies; one quarter international insurance companies; and the remainder private individuals. As with all of Brown Brothers’ funds, no placement agent was used, and Gould said his firm has offered LPs co-investment opportunities in the past and “would expect to do so again.”

In an interview in February, Gould said he anticipated a busy year despite the first quarter slump. Today he says his firm is “looking at 18 active opportunities.” Although BBH has made no deals yet with the new fund “three [possible] deals are in the handshake phase,” said Gould.

More generally, he said, “People are getting their arms around the fact that the high-yield bond market is not coming back. Senior banks are becoming more restrictive, companies are not going public and mezzanine debt is not as onerous as senior debt. It offers better financing flexibility, and [investors] are looking for capital structure to withstand the economy.”

As for an industry focus, Gould said historically the firm has concentrated a significant amount of investments on business and financial services and distribution.

“We’re very active service economy investors. We will look at manufacturing, but our investments will predominantly focus on the service sector” with the new fund, said Gould. He added BBH will focus on “strong companies with substantial enterprise values and deep management teams.

“We will try to make good investments at whatever pace that happens,” he said.

In other BBH news, Gould said it is still very likely that Brown Brothers’ 1818 Fund IV LP will come to market in “late 2001.” The firm is still investing 1818 Fund III LP, a $530 million private equity fund, but that fund is more than 75% invested. Fund III set out to make non-control investments in $200 million to $1 billion companies in the telecommunications, health care, energy and business services industries. Among those companies receiving investments from Fund III are National Equipment Services Inc., a construction equipment rental business, World Access Inc., a telecommunications business, Genesee & Wyoming Inc., a railroad operator, and Z-Tel Technologies Inc., a voice communication company.