Citing a dearth of available mezzanine debt funding on the continent, Lehman Brothers (NYSE: LEH) announced that it closed Lehman Brothers European Mezzanine Fund 2003 with $908 million (E750 million).
The firm set out last year to raise $606 million (E500 million). Lehman Brothers put $182 million (E150 million) into the fund. The firm says it raised the fund from more than 30 limited partners spread throughout the U.S., Europe and Asia. The fund will strictly invest in European companies and on mezzanine debt.
Christopher Cooke and Julian Entwisle, who serve as managing directors and principals of the fund, were responsible for the fund raising. Cooke’s appointment to the fund’s investment team was announced with the fund closing. He previously served in Lehman’s fixed income division.
Cooke declined to name any of the fund’s LPs. However he acknowledged that while the LP base is diverse, the fund may have appealed to some of types LPs more than others. “I think mezzanine has always held an appeal to insurance companies and I think that proved to be the case here. We also found other funds and family offices that were interested in something that had yield,” he said.
According to Thomson Venture Economics (publisher of Buyouts), past limited partners in Lehman Brothers private equity funds include American Express, Colorado Public Employees Retirement Association, Harman Investments, Hibernia Bank Pension Plan, Marsh & McLennan, Miami Valley Insurance Co. and Raytheon.
To date, the firm invested $200 million in 12 companies from the fund, which is focused on “old line manufacturing companies with free cash flow,” according to Cooke.
“The European high yield market has developed over the last few years. There was probably a thinking that the European high-yield market would provide a huge amount of financing for European buyouts, but our view is that while the market can be a very good market, it’s also subject to a certain amount of volatility and there are times when the market is open and times when the market is closed,” said Cooke. He added that there are structural advantages for investors through mezzanine funding as well. “High yield bonds tend to be fairly rigid in the structures, European mezzanine tries to give financial sponsors more flexibility in how they want to grow and exit their investments.”
Lehman is not alone in showing faith in the mezzanine market. TA Associates is setting out to raise $500 million for TA Atlantic & Pacific V, a new private equity fund that is expected to hold a first and final close in December. The fund will primarily be marketed to limited partners based outside of the United States and will do some earlier-stage deals and make mezzanine investments. New York-based media merchant bank Veronis Suhler Stevenson (VSS) is raising a mezzanine fund with a goal of $350 million. The fund, VSS Mezzanine Partners, is the firm’s first to focus on mezzanine. The firm had a first close in January for approximately $100 million. The mezzanine market has generated intensified interest since Goldman Sachs closed GS Mezzanine Partners III with $2.7 billion last year.