Data on mezzanine fundraising from Preqin’s Private Debt Online shows that the strategy has in recent years struggled to raise the amount of capital once attracted before the financial crisis of 2008. However, the statistics for this current fundraising year suggest that 2015 may well be witnessing a resurgence of the strategy.
Mezzanine Fundraising in the Post-Crisis Market
Mezzanine fundraising reached a peak in 2008 when 44 funds closed having raised just under $29bn. In 2009, this plummeted to $7.4bn from just 25 funds. Three years later this had only recovered to $13.5bn from the 29 funds that closed in 2012. In the post-crisis market, mezzanine fundraising reached its peak in 2013 with 43 funds raising a total of $17.4bn, yet this equates to just 60% of the capital raised in 2008. While this drop-off in fundraising was felt throughout the alternative asset space, this suggests a particularly prolonged recovery for mezzanine funds.
The recent emergence of strategies that encroach on mezzanine financing territory can help to explain these trends. In an environment of low interest rates, regulatory reform and divestment of bank loans, mezzanine funds have faced increasing competition from alternative financing solutions such as direct lending. Such ‘one-stop-shop’ financing solutions which can provide funding throughout the capital stack have put pressure on mezzanine fund managers.
Difficulty for First-Time Managers
Though the number of funds being raised has rebounded, the low totals in overall fundraising signal intense competition between managers attempting to secure investor capital. Significantly, 33% of investors in mezzanine funds will not invest with first-time fund managers. This may well be indicative of a conservative investment approach and a low tolerance for risk. The consequent struggle of new managers looking to raise mezzanine funds may well have hindered mezzanine fundraising.
Mezzanine fund managers have also struggled to consistently gain traction in new markets. In the vast majority of fundraising years, North America-focused mezzanine funds have attracted by far the largest proportion of capital. In some fundraising years, their share of this capital has been substantial. In 2013, for example, North America-focused strategies accounted for 85% of the capital raised by mezzanine funds. Some years have witnessed great expansion in other markets; in 2009, 57% of the capital raised by mezzanine funds targeted Europe – however, only one year later this had fallen to 27%. The proportion of capital raised by mezzanine funds targeting Asia and Rest of World has fluctuated with even greater volatility.
These figures suggest that the globalization of mezzanine fundraising has been prolonged and difficult, and is still ongoing. The maturity of the North American market and the comparative lack of institutions and transparency in other regions may well be the reasons why.
Resurgence and Outlook
Mezzanine fundraising has certainly seen difficultly in recent years, and the reasons for this continue to pose challenges for the strategy. However, mezzanine funds are continuing to attract substantial capital, and the fundraising data for 2015 YTD strongly suggests that this year is witnessing a comeback. So far, 16 mezzanine funds have closed this year having raised $12.6bn. This is already 43% higher than the amount of capital raised in 2014. Of course, this has been helped by Goldman Sachs raising one of the largest mezzanine funds ever seen. Its GS Mezzanine Partners VI Fund held a final close of $8bn in the first quarter of this year. This is further evidence of the enduring popularity of the strategy. Mezzanine funds remain an important pillar of private debt markets, and this does not look set to change.