Five Questions With…

David Petrucco, Co-Portfolio Manager,

Kayne Anderson Capital Advisors

How much did you raise for the fund you just closed?

We targeted $500 million and closed with $600 million for Kayne Anderson Mezzanine Partners. It was an interesting 18 months of fundraising. The core of our team was at Blackstone Group previously, but this is our first fund with Kayne.

How do you decide which companies to invest in?

We find opportunities through relationships we’ve established over the past 15 years. We will invest in private equity-owned businesses when a PE sponsor, bank or advisory firm that we know well calls us. The source of the deal means a lot to us. We like when we see something from someone we know who is an expert in that field and is excited about the opportunity. We focus exclusively on the middle market, so these are businesses with about $10 million to $50 million of EBITDA. We try to find areas where we have an understanding of the business or the industry and where we think we can bring value. For example, we recently provided capital for Advanced Interactive Systems Inc., a portfolio company of Sciens Capital Management, to support the technology-based training company’s growth.

How do you typically structure your investments?

Mezzanine for us is unsecured lending between the bank and the equity, where we do not have a claim on the assets. We will invest about six to 12 months longer than the banks invest, so it’s about four to seven years. We get most of our return from our coupon, which is typically in the mid-teens. Equity upside is nice, but it’s not the driving force behind our returns or investment decisions. We lend the money, get the money back with interest, and move on.

What kind of challenges have you dealt with in the current market?

We’ve dealt with restructurings and the occasional bankruptcy, but we’ve not lost money on a mezzanine investment in our careers, even though we’ve had a fair amount of problems. When you hit those walls, what do you do? Because we don’t do loan-to-own, we often help our clients raise the bank debt, and we’re often close to the people who own the businesses, so we sit in a room with a bunch of people that we know and try to find the best outcome for everyone.

What’s your definition of a successful deal?

We’re not trying to put our money out and get 3x our investments. If you don’t try to triple your money, you can do a pretty good job of avoiding losing your money; therefore our returns come in a pretty tight bandwidth, and that, for us, is a home run. By purposefully avoiding the grand slam, we avoid striking out.

Edited for clarity