Mezzanine firms targeting returns of 17 percent: Survey

Over half of respondents (57 percent) this year said they had completed their last platform investment within the last two months. That is up from about four in 10 (38 percent) last year and roughly the same percentage the year before (41 percent). Another one in four (26 percent) said that it has been two to four months since their last platform investment. A not insignificant eight percent said it has been more than 12 months. The average number of months since last platform investment is 2.8 months, while the median is 1.0 month.

That is according to a recent survey of 70 mezzanine investors by PNC Mezzanine Capital, the results of which were presented May 13 at the Atlantic Conferences Symposium on Mezzanine & Middle Market Finance. About a third of the respondents (35 percent) were categorized by PNC Mezzanine Capital as “traditional mezzanine” firms, another third (32 percent) as small business investment companies (SBICs), 16 percent as “institutional” investors, 9 percent as limited partner/co-investors. The tiniest category was business development companies (BDCs), at 8 percent. More than a third (37 percent) are working out of a fund of $151 million to $400 million in size; 28 percent are working out of a fund that is $401 million to $800 million. Below are other highlights of survey results:

• Recent deals tend to be on the small side, with target company revenues averaging $106 million; the median is $44 million.
• The average coupon on recent deals is 11.2 percent, the median 12.0 percent, according to respondents, while the average PIK is 2.0 percent and the median PIK is 2.0 percent. The average total rate is 13.2 percent, the median total rate 14.0 percent.
• The average equity ownership is 12.1 percent, the median equity ownership 4.0 percent.
• The average target IRR is 17.1 percent, the median target IRR 16.5 percent.
• The average fee is 2.1 percent, the median fee 2.0 percent. The average maturity of the loan provided is 5.8 years.
• The average leverage multiple is 3.9x, the median leverage multiple 3.8x. The numbers are slightly higher for sponsored deals.
• Service industries lead the way among targets, at 45 percent, followed by manufacturing (34 percent), other (15 percent) and distribution (6 percent).
• Mezzanine firms tend to invest in a mix of subordinated debt and preferred stock and/or common stock—the pick of 52 percent of respondents. Just under a third (31 percent) invest in subordinated debt only.