Crescent Capital’s Mezzanine Fund Among Biggest In Years

Crescent Capital, the Los Angeles-based credit investor, announced in August that it had closed Crescent Mezzanine Partners VI at more than $3.4 billion, blowing past its $2.5 billion target in the largest mezzanine offering in Crescent Mezzanine’s history, dating from 1992.

A spokesman said the firm would have no comment beyond its press release. Crescent Mezzanine Group targets investments in companies that are typically controlled by private equity sponsors and that have enterprise values in excess of $250 million.

According to data compiled by Thomson Reuters, Crescent’s Fund VI is the fourth largest mezz fund to be raised in the United States since 2008 (see accompanying table).

Mezzanine has been hit hard by persistent low interest rates following the financial crisis of 2008 and 2009. With senior debt pricing at spreads in the mid-single digits, mezzanine has had difficulty finding takers. Indeed, the Leveraged Commentary & Data division of S&P Capital IQ reported that subordinated debt contributed essentially zero to private equity deal capital structures in the second quarter.

Others are seeing a greater role for mezzanine. KeyBanc Capital Markets reported in August that 80 percent of junior debt providers reported closing at least one deal in the second quarter; that is up from the first quarter, when half of providers in the bank’s survey closed no deals. A year ago, in the second quarter of 2012, 76 percent of respondents said they closed at least one junior debt deal.

“When senior debt markets expand and they are aggressive,” as they have been in the last three years, “further down in the capital structure, that really begins to box out the junior debt market, especially mezz,” said Andrew Frawley, managing director and head of private capital at KeyBanc Capital Markets.

Part of the pressure comes from senior debt itself, while additional competition comes from other flavors of debt, such as unitranche financing vehicles that have gained traction since the financial crisis, Frawley said. Junior capital “is very expensive compared to senior debt but inexpensive compared to equity.”

But with the Federal Reserve promising to taper off on the market interventions that have kept interest rates low, the market for mezz is likely to pick up, Frawley said. “As senior capital becomes more expensive, junior capital looks like a more acceptable alternative.”