Mezzanine popularity could harm future recovery rates

The increasing popularity of investing in European mezzanine is encouraging new investors to enter the market who are unlikely to be committed to mezzanine over the long term, says a special report by Fitch Ratings. With an increasingly diverse investor base and further downward pricing pressure likely, many future mezzanine syndicates will no longer comprise a small number of players with homogeneous interests. The agency believes that these factors may have a negative impact on future mezzanine recovery rates.

A number of new mezzanine funds came to market in the first half of 2004. Lehman Brothers completed a European mezzanine fund raising that closed in May totalling €750m. ICG raised a €650m fund in May. Summit Partners raised a €380m fund. And Robin Doumar, formerly of Goldman Sachs Mezzanine Partners is reportedly raising a fund through a new independent mezzanine vehicle. GSC Partners is also raising a €500m mezzanine fund.

Fitch expects the environment for mezzanine to remain highly competitive for the rest of year. The agency anticipates downwards pressure on mezzanine pricing will continue, reflecting an inevitable adjustment to the traditionally attractive risk-reward profile of the asset class over recent years.