Scott Becker, Managing Partner, Northstar Capital –

What’s your take on the recent increase in competition in the mezzanine market?

We have seen a much more competitive market in the last 12 to 24 months in mezzanine, more so though at the higher end of the market. We look at mezzanine in small market, mid-market and large-market segments. In the larger market and the mid market segments, hedge funds and, to a lesser extent, BDCs are having an effect. In our market-companies with cash flows ranging from $3 million to $8 million of EBITDA-we’ve seen a fair amount of SBICs, but they’re restricted in terms of the size of the transaction they can do.

What’s your take on the trend of completing deals without junior financing?

We haven’t seen as much of that because in the smaller deal marketplace, equity sponsors have been happy to have mezzanine as a component of the capital structure. It allows them to reduce the amount of equity that they would put into the transaction.

That trend may occur in the larger transactions as a way to allow those deals to get done quickly. We’ve seen many equity sponsors who, upon completion of a successful senior debt and equity only transaction, come back to the market 12 to 18 months later for additional senior or mezzanine financing, which allows them to get a distribution of equity capital back to their investors. It’s a good proving ground for a mezzanine lender to see a deal prove out for 18 months, because that’s the most difficult part of any transaction.

How has the presence of these financial providers effected your overall investment strategy?

For the hedge funds and some of these other players, it really doesn’t make sense to be doing $3 million to $5 million cash flow deals, so as a result we haven’t seen as much pressure in our small market mezzanine space, but that’s not to say that some of the equity sponsors that we work with don’t use that potential threat as a way to negotiate prices.

You’re currently raising your fourth mezzanine fund. What’s the fundraising environment been like for you these days?

It’s been very competitive. We were happy that we were able to get to the market late in the first quarter, probably ahead of some other groups. We have a very loyal group of core investors that have come back and we’ve had a first closing of $180 million. We’re well on our way to our $250 million target and that’s off of a $124 million prior fund so we’re quite pleased, but it’s quite competitive out there.

I think what makes mezzanine attractive in today’s environment is the ability to generate 11% to 12% current coupon for investors with some equity upside. That still is a very attractive thing when you compare it to the returns that are available in the public marketplace right now, whether it be a public equity marketplace or the public debt marketplace.

What sorts of deals have you been looking at recently?

We’ve been looking at a number of service transactions and transactions in the food and light manufacturing sectors. The transactions that we’ve seen have had funded debt multiples in or around 4x and purchase price multiples in the 6x to 7x range.