Mezzanine funds

ABN AMRO Mezzanine held an initial closing for its second fund in October last year when it had secured GBP105 million. Of this the bank provided GBP50 million. The first fund, now fully invested, raised GBP75 million in 1998. The UK-based team has so far been cautious with its new fund but expects to close two investments by year-end. It will focus on mid-market deals with mezzanine positions of GBP3 million to GBP30 million. Barrie Moore, one of ABN AMRO Mezzanine’s four managing directors, estimates around 70 per cent of the fund will be invested in the UK with France and Germany dominating the remaining 30 per cent. Moore believes the appetite for vanilla mezzanine is already well catered for in the UK and is looking to develop the investor’s role as a supplier of development capital and as a financial sponsor. Moore is eager to do more deals like the public-to-private of the Epwin Group, completed in January last year, which he hopes will see higher returns. This transaction was unusual in that it was financed through mezzanine and senior debt, without private equity. Moore also believes more education is needed about the role of mezzanine, both by the deal facilitators and investors. He thinks mezzanine funds, such as ABN AMRO’s vehicle, represent a good entry point for first time investors in private equity.

AIG-MezzVest is adopting a new approach to mezzanine. The investment vehicle, launched at the beginning of this year, hopes to raise approximately euro650 million through a structure along the lines of a CDO fund. AIG-MezzVest is a division of CapVest and has received funding from American insurance company AIG, part owner of CapVest. With the support of Abbey National, CIBC World Markets and Merrill Lynch the vehicle has so far raised euro200 million in debt and euro200 million in equity. AIG-MezzVest will take loans of up to euro100 million or euro200 million in combination with other mezzanine providers. It will finance around 15 deals across Europe. Under the control of Lemy Gresh, Doug Evans and Stephen Mostyn-Williams the investment vehicle aims to do away with equity warrants, reduce the cash coupon and instead rely on a higher payment-in-kind (PIK). AIG-MezzVest will be leveraged with about a third equity and two-thirds debt.

The Bank of Scotland’s mezzanine activities come the under jurisdiction of it’s structured finance division. There is no pre-determined amount allocated to mezzanine, investments are made directly from the bank’s balance sheet as and when suitable opportunities arise. Graham Sturrock is head of investments and mezzanine. The bank tracks all mezzanine deals in Europe and reports a total of GBP1.9 billion being underwritten in the first seven months of this year. In the 12 months to February 2001 the bank’s own mezzanine commitments have increased from GBP300 million to around GBP500 million. The bank generally provides mezzanine in tranches of GBP10 million to GBP20 million, although the upper limit is flexible and more likely to be stretched for a deal involving a bank customer.

The leveraged finance division of BNP Paribas supplies mezzanine finance in conjunction with senior debt as a one-stop debt solution. These commitments are met by the bank’s balance sheet although a dedicated mezzanine fund may be on the agenda next year. Jean Bergeret, based in Paris, is head of leveraged finance Europe and Don Ercole is responsible for the UK and Northern Europe. Annually BNP Paribas underwrites between GBP100 million and GBP200 million in deals from GBP5 million to GBP100 million, holding 10 per cent to 30 per cent of this. The remainder is sold down to specialist mezzanine funds and increasingly CDO/CLO funds.

The leveraged finance group of CIBC World Markets is responsible for the bank’s mezzanine, senior debt and high yield bond activities. This division is headed by Christopher Rist in Europe. CIBC does not have a mezzanine fund; investments are made from the bank’s balance sheet according to demand, which Rist says is currently not huge. The bank is capable of underwriting deals of up to euro200 million across Europe and the UK, although deals are typically euro50 million to euro100 million. Generally the bank hopes to hold around 10 per cent of the mezzanine it underwrites between euro100 million and euro200 million in total per year.

Deutsche Bank’s $1 billion mezzanine offering, DB Capital Mezzanine Partners, was launched in February this year. It was fully funded by the bank and is designed to invest in companies seeking sponsor related capital, growth or liquidity capital on both sides of the Atlantic. Steve Robertson, managing director within DB Capital Partners in London, co-ordinates the fund’s European activities and Manjit Dale, managing director and head of DB Capital Partners Europe, sits on the investment committee. Around half of the vehicle, to be invested over a three-year period, is destined for European deals. Typically the fund holds 10 per cent to 15 per cent of the mezzanine it underwrites, a figure in excess of euro100 million in the last year.

Dresdner Kleinwort Wasserstein has built up its mezzanine activities since the buyout by the former principals of Kleinwort Benson Mezzanine Capital to form Indigo Capital. It’s investments come from the bank’s balance sheet and as such there is no fixed amount allocated to mezzanine. Dresdner Kleinwort Wasserstein does not generally invest mezzanine in isolation, preferring to provide it as one part of a debt package. There is no ceiling on the size of investments and the bank, with the support of its newly established financial sponsors team, is keen to work on larger transactions. It always syndicates its deals, normally holding between GBP5 million and GBP10 million. Peter Watts, managing director in the financial buyers group global debt origination, estimates the bank has underwritten about euro150 million in mezzanine over the last year and is holding around euro40 million to euro50 million of that.

Euromezzanine Conseil, is currently investing its Euromezzanine 3 Fund, which closed on euro230 million in September last year.

Louis Vaillant, who heads the Euromezzanine team with Guy Fabritius, reports a healthy flow of deals at the moment but he expects a slight decline in the coming months. The team’s energies remain focused on growth financing deals of euro2 million to euro80 million mainly in France. Vaillant anticipates fundraising for Euromezzanine 4 will start at the end of the year. With the continued support of BNP Paribas and Natexis Banques Populaires he hopes to raise around euro400 million, depending on the market.

Finnish private equity house CapMan manages three mezzanine funds, under the name Finnmezzanine. Three members of the buyout team manage investments from these funds, which total euro270 million. CapMan is working with other private equity houses in the region to educate the Nordic buyout market about the currently underdeveloped role played by mezzanine. The most recent Finnmezzanine fund raised euro150 million last year, 20 per cent of which has been invested so far. Finnmezzanine currently only invests in the Nordic region, targeting mid-size buyouts requiring mezzanine participations of between euro10 million to euro30 million. The firm does not anticipate raising another fund until 2003.

Fuji Bank’s mezzanine investments are made through its structured finance division. Jeremy Ghose, joint general manager, heads a London-based team of 19 investing directly from the bank’s balance sheet. will provide mezzanine facilities from GBP50 million upwards. In June this year Fuji Bank backed EQT’s acquisition of Electrolux’s leisure appliances division with senior debt and a mezzanine tranche totalling SEK1,025 million (euro111 million).

The bank generally syndicates the senior debt and will often bring specialised mezzanine providers into a deal.

The mezzanine finance activities of Goldman Sachs are led by Robin Doumar, who left Goldman Sachs’ European leveraged finance team, which he shaped and led from both New York and eventually Europe, to head the bank’s European mezzanine efforts at the beginning of this year. In the year previous to Doumar’s move to take charge of the European mezzanine investment operations Goldman Sachs had set up a global mezzanine fund giving the team running it a GBP1.5 billion spending capability.

Last year US investor GSC Partners launched a European mezzanine fund, which is now preparing for it’s final $1 billion close. The fund’s main investors are Citigroup and MSD Capital. GSC Partners Europe has a team of six based in London and is chaired by Richard Haydon. It will invest throughout Europe in mezzanine positions of between euro20 million and euro150 million. Christine Vanden Beukel estimates the fund will take around three years to invest. As well as mezzanine GSC Partners also participates in private equity and high yield bond investing.

IFE Conseil, the Paris-based independent mezzanine provider, last year closed a euro250 million fund, which is now some euro70 million invested. Minimum and maximum investment sizes are euro5 million and euro25 million, respectively. In terms of geography the fund has invested in Europe’s most active mezzanine markets namely France, Scandinavia, the Netherlands and UK. The fund typically invests in buyout transactions.

IFG Mezzanine, based in Manchester and London, acts as loan advisor to the Industrial Mezzanine Fund. The fund focuses small and medium sized enterprises in the UK, typically with a turnover of between GBP3 million to GBP50 million, engaged in manufacturing, distribution or industrial services. Industrial Mezzanine Funds was established in 1997 by Industrial Finance Group Limited.

The fund has raised GBP30 million from institutional investors and has received support from the European Investment Fund.

Indigo Capital, formerly Kleinwort Benson Mezzanine Capital, is investing from European Mezzanine Fund III (EMF III). This fund was raised in 1999 and has invested around 60 per cent of the euro250 million figure raised. EFM III was raised in anticipation of being independent of Kleinwort Benson and although a further fund could technically be closed when EFM III is 75 per cent invested it’s unlikely that Indigo Capital will look to do that. Indigo Capital invests in continental Europe and the UK and has an average deal size of around euro10 million.

The four directors of Indigo Capital, who formerly ran Kleinwort Benson Mezzanine Capital, are Richard Collins, Christopher Howe, Kevin Murphy and Martin Stringfellow. Since their buyout from Kleinwort Benson, the team has expanded and continues to do so.

The UK-based Intermediate Capital Group is a mid-market player keen to handle increasingly large deals, such as the GBP100 million mezzanine tranche in the Picard Surgeles MBO.

The ICG Mezzanine Fund 2000 raised euro374 million at it’s first close a year ago and it remains open. Since last February the fund has invested around 50 per cent of the funds provided by investors such as Abbey National, ABP, Bank of Scotland, Caisse de Depot and Partners Group. Graham Smith reported ICG’s fourth private placement in the US has gone well. In addition to this ICG raised euro350 million this year for its Collateralised Debt Obligation Fund II. Although the high yield market is currently tight ICG is happy to continue with this type of vehicle as senior assets and mezzanine are still working well for them. ICG, which has a representative office in Paris, provides a flexible range of debt and quasi-equity financing up to GBP200 million for deals throughout Europe.

Mezzanine financing is being pioneered in Austria by Invest Mezzanin, which launched a euro40 million fund last year.

So far the fund has made six investments, spending around a third of it’s capital. Oliver Grabherr, one of the funds managing directors, said the focus was currently on growth capital situations. The fund hopes to become more involved with the German and UK mezzanine market. It can fill positions of up to euro5 million but generally participates in syndicated deals. The fund’s investor, Austrian bank Investkredit, has also committed capital to Euromezzanine Conseil and Invest Mezzanin hopes to build on the relationship this has initiated. With the continued support of Investkredit Grabherr would like to raise a second fund in the first half of next year, including third party contributions.

Legal & General Ventures (LGV) mezzanine activities are mainly conducted through the Mithras Investment Trust. Legal & General holds a 41 per cent stake in the 11-year-old trust, also which has been listed on the London Stock Exchange since 1994.

This year, through the trust, LGV has allocated GBP25 million for mezzanine investments but additional finance can be provided direct from the balance sheet of Legal & General. Darren Hart, associate director, says Legal & General is not a volume player when it comes to mezzanine. Deals will be around GBP5 million.

Hart sees his role, as marketing Mithras and building-up its assets. He also ensures there is no conflict of interest with the firm’s other private equity activities. Consequently Mithras does not lead or arrange mezzanine deals, even when they are homegrown.

Lehman Brothers’ mezzanine investments are held on the banks’ balance sheet. Lehman offers a one-stop-shop for leveraged finance with Peter Combe, the head of financial sponsors and leveraged finance, co-ordinating mezzanine commitments along with associated high yield bonds and senior debt. So far in 2001 Lehman has underwritten three European deals totalling almost $400 million. Combe estimates Lehman will hold around a third of this amount. The investor has a large appetite for mezzanine with no upper limit on the size of deals to be underwritten.

Looking forward investments will also be made from a dedicated European mezzanine fund supervised by Julian Entwisle.

Merrill Lynch prefers to act as lead and arranger on mezzanine deals as part of a complete leveraged finance package. The $1.1 billion ML Mezzanine Investors fund has only been used selectively in European deals, as it is primarily a US instrument.

Ian Gilday, director of debt capital markets and European leveraged finance, calculates Merrill Lynch has underwritten around 500 million in the last year and is holding between 15 per cent and 20 per cent of this. He says Merrill Lynch would look at all types of mezzanine and believes in the concept of bespoke paper with no two deals being the same. A large number of Merrill Lynch deals include PIK elements and it would consider transactions that didn’t include a warrant.

Mezzanine Management is in the process of investing its third fund, Mezzanine Management Fund III, in Europe and the US.

This fund, of euro500 million, was closed last year. The firm is also in the midst of raising its first mezzanine fund for investment in Central Europe and has hired a team led by Franz Hoerhager, who is based in Austria, to invest this fund. The fund is called Accession Mezzanine Capital. A first close is expected for Accession Mezzanine shortly and the eventual target is euro150 million.

Nordic Mezzanine, has invested around half its euro102 million Nordic Mezzanine Fund 1. The Finnish fund was launched in 1999 and had a final close in January this year. Vesa Suurmunne, chief executive of Nordic Mezzanine, hopes to raise a larger fund in the next 12 months targeting the Nordic pension funds and insurance companies which contributed to the first fund. The company mainly focuses on the Nordic region but also invests in Europe. Transaction sizes extend to around euro200 million, with underwriting mezzanine positions of euro5 million to euro30 million. Investments are based on cash flow and Suurmunne favours growth capital investments in mature sectors.

PRICOA Capital is currently investing PRICOA Private Capital Partners II, a euro540 million pan-European mezzanine and private equity fund closed last October. Around a third of this is already committed and fund three is expected sometime in 2002, depending on the market. Of the fund current around 70 per cent is for mezzanine investing while 30 per cent has been allocated to straight-forward private equity. Mark Brunault, partner at PRICOA, estimates a third of investments are in the UK, a third in Germany and a third in the rest of Europe, mainly in France. The investor focuses on the mid-market with commitments ranging from euro5 million to euro50 million or euro120 million with the help of co-investors. PRICOA is a subsidiary of US insurer, Prudential, which provides 15 per cent of PRICOA’s funding.

Established in 1997 the Royal Bank of Scotland’s mezzanine division, RBS Mezzanine, is one of the UK’s most active providers with current investments in over 80 deals exceeding GBP500 million. This year the bank provided RBS Mezzanine with 1 billion for it’s third fund. Headed by Jim Stevens, managing director of RBS leveraged finance group, the bank focuses on the core mid-market in the UK and Europe, So far this year RBS Mezzanine has arranged just under GBP200 million in mezzanine, of which it is holding approximately GBP120 million. RBS focuses on mezzanine positions from as little as GBP2 million up to GBP30 million and will arrange tranches significantly in excess of this for larger deals. Bruce McLaren, head of RBS Debt Ventures, focuses on financing leveraged deals without private equity involvement.

SEB, the Swedish bank, is active in the mezzanine market throughout Europe. Simon Wakefield, global head of acquisition finance, spends two days a week in Stockholm but is based in London with Simon Wheatley and Jonathan Franks. Since June 1997 when the bank allocated SEK1 billion (105 million) to a mezzanine fund the team, has overseen 17 investments. In August the bank increased it’s mezzanine commitment by a further SEK0.5 billion and Wakefield is confident that over the next year this will rise to SEK2 billion. SEB invests in mezzanine transactions of typically GBP10 million in the Nordic region, the UK, Benelux and German speaking Europe, although it has also done US deals. The bank would hold all of a debt this size but in larger deals (up to GBP75 million) it will act as underwriter and sell the debt on. SEB holds warrants for most deals but is a flexible investor, investing mezzanine independently from senior debt.