By most accounts the mezzanine market has come on like gangbusters in the last decade, spurred in the U.S. by the consolidation among the senior lenders and in Europe by the rising frequency and value of LBOs. Goldman Sachs, at the forefront of the mezzanine takeoff in 1996 with its $1.2 billion GS Mezzanine Partners I fund, is again making news in the space. This time the firm closed its latest mezzanine fund, GS Mezzanine Partners III, at $2.7 billion, making it the largest fund of its kind.
The buzz around mezzanine undoubtedly aroused interest for the Goldman fund. Muneer Satter, head of the Goldman Sachs Mezzanine Group, said, “Investors saw an opportunity in the demand for capital in this area… the space has been growing as private equity activity has increased. Investors also like the returns of [mezzanine] historically, and are high on the prospects [of mezzanine] as far as the deals the space will see going forward.”
While Satter would not give the return figures of Goldman Sachs’ past mezzanine funds, he did say, “Typically our coupons are in the 12% to 15% range with warrants, although we are flexible so we will go with higher coupons and lower warrants or lower coupons with higher warrants.”
Like its previous mezzanine efforts, Goldman Sachs will dispense financing in both the U.S. and Europe, with a split of roughly half going to each region. The firm will again attack the higher end of the mezzanine space, targeting investments of between $40 million and $200 million, in LBOs ranging from $300 million to $600 million.
It’s this strategy, according to Satter, that keeps Goldman Sachs from getting bogged down by the flood of new competition in the mezzanine market, a deluge that has swamped the lower end of the sector, leading some to cut their coupon rates.
“In the U.S., we’re focused on the middle market buyouts that are too small for high yield, but too big for the smaller mezzanine providers that can’t do more than $20 million or $30 million in one bite,” he said.
Meanwhile, in Europe, the mezzanine providers face more competition from the senior lenders, but the high yield market is not as dynamic, which allows Goldman’s high-end focus to fill a separate void in that region. “Where high yield is less prevalent, we’re doing much larger deals, and our strategy in Europe is to focus on the larger transactions,” Satter said.
Goldman Sachs did not use a placement agent to assist with the fund, which drew interest from returning investors and new investors alike. The firm also benefited from the loyalists at Goldman Sachs, with over $600 million coming from both the firm and its employees. As far as the other investors, Satter would only say the list includes the usual suspects of pension funds, insurance companies, endowments and wealthy individuals.
Also, the terms of the fund follow a “pretty standard structure,” according to Satter, with management receiving a 20% carried interest.
Goldman Sachs has wasted no time putting the money to work. The fund has already made two investments. It invested $125 million of subordinated debt into the Apax Partners financing for its E520 million Frans Bonhomme acquisition and another $140 million into Candover Investments’ and Cinven’s purchase of Bertelsmann-Springer.
“The last two funds have had a run rate that averaged out to around $800 million a year,” Satter said, adding, “My guess is this fund will be similar to the previous two, which deployed their capital within three to four years.”