Launched in April last year, GSC European Mezzanine Fund II will continue in the same vein as its predecessor, investing in mid-market deals across Europe, led by the same team that invested Fund I, including vice-chairman of GSC Partners and chairman of GSC Europe Richard M Hayden, and senior managing director Christine K Vanden Beukel through the firm’s London office.
More than 20 new investors have committed to the vehicle, which has also managed to retain a number of LPs from the previous fund, which closed in 2002. The team expects to deliver returns in the mid-teens on the new fund, a figure that investors seem to be confident the fund will achieve given the number of existing investors that have re-committed to the second fund.
Richard M Hayden says: “The mezzanine business in Europe has traditionally earned attractive, risk-adjusted returns, significantly higher than those for a commensurate amount of risk elsewhere in the world. Investors’ interest in this fund is a testament to the current attractiveness of the European mezzanine business, the strong performance of Fund I, and their trust and confidence in GSC’s experienced team.”
Christine K Vanden Beukel explains the fund’s investment strategy: “We think European mezzanine is more attractive than in the US. But we do have a high proportion of US LPs. I think the US LPs like the diversity they get from a European fund. The European mezzanine market is in a way more advanced than the US in that it tends to back larger deals, whereas in the US they tend to be smaller. I think the LPs like it because it also diversifies their portfolio into different stages of deal and market capitalisation.”
The mezzanine market in Europe had another record-breaking year in 2005, with issuance totalling €10.7bn, comfortably exceeding 2004’s record of €5.8bn, according to ratings agency Fitch. And according to the agency, market demand is so strong that arrangers are suggesting Europe might complete its first €1bn facility in 2006. In November 2005, the largest European mezzanine transaction on record was arranged for Gala-Coral at €676m.
Mezzanine volume in 2005 was fuelled by a combination of accelerated transaction recycling and the resurgence of jumbo mezzanine transactions. Financial sponsors pushed for faster recapitalisations for the purpose of dividend payouts and exits through secondary and tertiary sales to fellow sponsors, leading to an upsurge in recycled mezzanine issuance.
Vanden Beukel is aware of the ever-increasing appetite for mezzanine: “In terms of volume, the mezzanine market is enormous and has been growing quickly in Europe. 2005 was another record year in terms of issuance for mezzanine and mezzanine is continuing to be a popular instrument for financing LBOs. The number of transactions we are looking at is probably the busiest we have ever been in terms of volume.”
But Fitch warns that although smaller than the volume of defaults in the European high-yield bond market, the default and recovery rates for mezzanine are likely to emerge as key areas of concern for the market. Fitch points to the poor quality of recently issued mezzanine in the wake of strong prepayment activity. Consequently, the agency expects an increase in default rates and more complicated workout negotiations, thus potentially depressing recovery rates for par value mezzanine holders.
In terms of pricing, Vanden Beukel notes that changes have been minimal, but says that what you do need to worry about in today’s market is credit quality, particularly in the larger buyout space. “In the mid-market the deals are a little less racy and so we are spending more time in this space,” she says.
GSC Partners currently has more than US$9bn of assets under management. The firm specialises in credit-driven investing, including control distressed debt, corporate credit, European mezzanine lending and structured finance. GSC Partners, with more than 140 employees, is headquartered in New Jersey and has offices in New York, London and Los Angeles.
GSC’s investors include both institutional investors and substantial net worth individuals seeking sophisticated and attractive alternative investing opportunities. The group has been providing mezzanine capital in Europe since 2000. The first GSC European Mezzanine fund was launched in April 2000, and closed on €765m of committed equity capital in October 2001 before signing an additional €300m credit facility to leverage the fund. It is now fully invested.
A version of this article was published in the May issue of Thomson Financial’s European Venture Capital Journal (EVCJ).
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