Preqin Investor Network currently tracks 69 mezzanine funds on the road with targeting an aggregate $25bn in capital commitments; these funds have an average size of $405mn. Preqin’s latest Investor Outlook: Private Equity, H2 2012 reports that 8% of investors view mezzanine funds as offering the best opportunities at present and 7% are set to make an investment in this fund type over the coming year. For investors who want to evaluate potential opportunities within mezzanine strategies, it is important to compare how this strategy has performed historically compared with other types of private equity vehicle.
Investors can use Preqin’s Horizon IRRs to compare the spread in performance between various private equity strategies and evaluate which strategy offers the best historical returns. Preqin’s Horizon IRRs indicate how the private equity industry is performing during a defined period (one-, three-,five- and ten-year periods) and are calculated using the fund’s net asset value as a negative outflow at the beginning of the period, any cash paid or received during the period, and the fund’s residual value as a positive inflow at the end of the period.
Over a short term time frame (one-year to 31st of December 2011) mezzanine funds report the most attractive returns of 15.7% compared to buyout and venture funds returning 8.4% each, and the strategy also outperformed the whole private equity universe, which returned 9.2%. However, in the longer term the relative performance of each strategy changes significantly. Over the three years to December 31st 2011, mezzanine funds underachieved compared to the entire private equity universe, which yielded 13.9% while mezzanine funds reported returns of 9.3%. Buyout and venture funds returned 15.7% and 7% respectively during this period. Performance of private equity in the five years leading up to December 2011 saw significantly lower returns. The entire private equity universe yielded 5.4% while mezzanine funds reported returns of 5.6%, buyout funds reported 6% and venture funds reported 2.8%.