2014 Predictions: John Harrison, Harbert Mezzanine Partners

As private debt continues to grow as an asset class, limited partners must find new ways to allocate, says John Harrison of Harbert Mezzanine Partners.

Mezzanine continues to thrive in the small to lower mid-market. John Harrison of Harbert Mezzanine Partners spoke with Private Debt Investor about how investor appetite, regulation and the community banking sector are shaping opportunities.

You’ve had a very busy second half. Going into Q1, then rest of the year, what’s on your radar? 

From the market standpoint, 2014 is going to be a continuation of 2013. We’ve still got, from a senior debt standpoint, banking regulation that they’re dealing and that’s not going to change. I don’t think it’s going to get worse, but it’s not going to change.

Private debt is becoming much more of an asset class on its own. People are realizing that this is a place they need to be, and that private debt can be a fixed income alternative as we navigate a low-rate environment.

As people are figuring that out, how are they allocating to it? 

The real big difference around allocations is between liquid and illiquid. There’s a lot more money going into the liquid space, and that money I think is an alternative to fixed income. Because instead of holding a bond maybe I’m holding some liquid senior debt, CLOs, whatever. You see the liquidity premium in pricing.

If you look at the illiquid, locked up money in private funds like ours, it’s coming from different allocations, more from a private equity allocation or true alternative allocation.

We don’t see a lot of people taking money out of the fixed income bucket to invest with us.

One thing we’ve discussed quite a bit recently is the role of community banks in the market. Is that something you’re still keeping an eye on? 

Yes. We think the community banks, or smaller banks, are more flexible and are a great complement to us. They can do things that are maybe a little more out of the box than you’re going to get from a much larger regional bank.

When you look at the senior lenders in my deals, it’s more likely to be a smaller community type bank. And there are a number of those banks that are really more of a commercial business model, they don’t have branches and don’t do consumer or retail lending. It’s more pointed at the small business community.