Mezzanine vehicles continue to attract investors in private equity funds as a bridge between equity and debt financing. An explosion of viable distressed private equity investment opportunities has been the result of the constriction of the credit markets and slowdown in economic growth that afflicted markets around the world. Subsequent improvements of the market’s economic conditions will then intensify competition for mispriced debt and suitable restructuring opportunities.
At present, almost a quarter (24%) of investors tracked by Preqin’s Investor Intelligence online service have previously invested in or expressed a preference for mezzanine vehicles. Private sector pension funds make up the largest proportion of investors in mezzanine funds (17%), closely followed by public sector pension funds (16%). Foundations and insurance companies also make up a significant percentage of investors in mezzanine funds, at 12% and 11% of investors respectively.
Investors based in developed markets continue to have the greatest interest in mezzanine vehicles, with 63% of LPs based in North America, and just under a quarter based in Europe (23%). The remaining 14% of investors with a preference for the fund strategy are based in Asia and other economies outside of North America and Europe.
In December 2013, Preqin surveyed over 100 institutional investors globally for our bi-annual Investor Outlook report, which can be found in full here. Results showed 11% of investors surveyed viewed mezzanine funds as currently presenting the best investment opportunities. Furthermore, 23% of participant LPs indicated that they plan to make commitments to the fund type over the next 12 months. Investors looking to commit to mezzanine vehicles during 2014 include Teachers’ Retirement System of Louisiana, which expects to commit between $275mn and $350mn to mezzanine and distressed debt vehicles over the next 12 months. Employees’ Retirement System of the State of Hawaii is also considering committing to mezzanine funds during the course of this year.
Of investors expressing a preference for mezzanine funds, over a third (35%) will commit to a pure first-time fund, while 15% will consider doing so. Eighteen percent of investors will commit to funds raised by a spin-off management team. Half of investors with a preference for mezzanine funds will commit to a fund before it has held an initial close, and just over a quarter (26%) will consider doing so.