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A More Conservative Approach by Mezzanine Funds in Market? – February 2014

by Christopher Hardy

  • 12 Feb 2014
  • PE
  • PD

According to Preqin’s Funds in Market online service there are 61 mezzanine-focused funds currently raising capital, with five mezzanine funds having already reached a final close in 2014. Such figures point toward a promising year for mezzanine fundraising, increasing the capital available to these managers. However, competition in the industry means that deals are becoming harder to find amid an increased number of alternative finance options, including more traditional direct senior lenders, high yield bonds and unitranche funding mechanisms. 

Preqin’s data is suggestive of a trend for currently active mezzanine fund managers launching funds that are conservative in their target sizes compared to recent previous years, where we have seen notable gains in the amount of capital garnered. Presently, 61 funds are seeking to raise a total of $16bn; a similar amount of capital was collected by mezzanine funds in 2013 but by just 38 funds. It is a relatively common practice for fund managers to increase the target sizes of successor vehicles, particularly following the success in reaching final closes in previous rounds. Preqin’s Funds in Market online service also notes that the average size of funds currently in market is $276mn, which is well below last year’s figure of $446mn and even further below the $514mn average size for 2012. 

Saturation in the mezzanine market is particularly telling in Europe, where the average fund size has decreased from a high in 2012 of $602mn to just $245mn for current funds in market. This scaling back of fund sizes is also affecting the largest geographic market for mezzanine fundraising, the US. The 31 mezzanine funds currently in market that are primarily focused on the region are targeting an aggregate total of just over $10bn and have an average size of $348mn, down from $505mn in 2013. 

At present, there are 11 mezzanine funds raising capital that are being marketed by managers that have not raised a mezzanine fund before. This is a significant number considering that only three first-time mezzanine funds closed in 2013 and only one first-time mezzanine fund was closed in the year before that. In fact, 2007 was the last year during which more than 10 mezzanine first-time funds closed. 

The largest mezzanine fund currently in market is the Tower Square Capital Partners IV fund, raised by Boston-based Babson Capital Management. The fund is seeking to raise $1.6bn from investors and is the only such mezzanine strategy fund in market at the moment that is aiming to raise a target of over $1bn, though that is expected to change with the anticipated launch of Park Square Capital Partners III some time in Q1 2014, whose predecessor fund held a final close of an equivalent of $1.2bn.

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