A fine mezz

London-listed European mezzanine provider ICG is growing rapidly - despite being more selective on deals than ever. Robert Venes reports.

Despite increased competition in the provision of mezzanine products, the last 14 months have proved to be a good period for Intermediate Capital Group (ICG) in London.
Last week, ICG released its results for the fourteen months ended 31 March 2006, reporting a 98 percent increase in gains on investments, with £145 million compared to £63 million for the 12 months to 31st January 2005. Pre-tax profits increased by 72 percent to £190 million, while funds under management increased to £3 billion.

Belsham: record number of deals rejected for being too risky

For Katharine Belsham, corporate strategy director at ICG, the most important result for the firm was its 22 percent increase in core income to £106 million, compared to £75 million for 2005. “It’s been an excellent 14 months, especially in terms of growing our core income by 22 percent – not many companies can grow their profits by that margin,” Belsham tells PEO. “The results were driven by a very strong period for the buyout and mezzanine market, with the latter almost doubling in the period, from about €5.4 billion in the previous year to approximately €9 billion currently.”
Belsham says that as the private equity market has increased, so has its acceptance of mezzanine. “I think private equity has realised that mezzanine can be much more flexible than high yield bonds and with the much higher prices the firms are having to pay, frequently through competitive auctions, they are having to use financial leverage in order to maintain returns,” she says.
As a result, says Belsham, ICG has been able to make the most of its relationships with private equity teams in local markets.
Not all of the results were entirely positive though, for the private equity industry at least. In the period, ICG also turned down a record number of potential new deals on the grounds of excessive risk. “Some companies we had to say no to,” says Belsham. “They were strong companies, it wasn’t to do with the quality of the underlying businesses and many of them were already private equity-owned. It was much more about the financial packages that were being structured, which were too risky for the rewards being offered.”

Tom Attwood, managing director of ICG, said in a video interview on the firm’s site at the time of the results that such over-leveraging is a ‘concern’, despite helping in the short-term by allowing ICG to refinance or sell some of its “more worrying assets”. Both Attwood and Belsam, however, admit that the firm is bound to have made some mistakes in its credit decisions, but that the trick is to limit the numbers – according to Attwood, ICG turned down double the amount of deals it did in the previous year.
However, if those deals find favour elsewhere and ICG’s risk assessment proves correct, there could still be opportunities in the event of a downturn. “We see it as a great opportunity as we’re long-term players in the market and there re a number of groups such as hedge funds who have to generate short-term revenues, so they will have to sell out of portfolios and we can get to invest in good companies being sold sub-par,” says Belsham. “Private equity sponsors are also likely to stick with using houses that they know well and have a track record with.”
Those relationships and networks – now enhanced in Asia, where ICG has had a Hong Kong office since 2001, with the firm’s recent closing of its first Asia-focused mezzanine capital fund with $500 million of commitments – will stand ICG in good stead in the event of a market correction, says Belsham.

“If there are fewer deals as the mezzanine market shrinks, we will be well positioned for that,” she says. “When we started out, we were the big fish in a small point and now we’re reasonable-sized fish in a bigger point. In the event of a downturn, I’d expect the situation to reverse again.”
Given its latest set of results, ICG believes it is well placed to deal with the future, whatever size pond it finds itself in.