Exclusive: Rantum eyes €80m first close on Mittelstand fund

German private debt manager Rantum Capital has a portfolio of investments worth €40 million in the pipeline.

Frankfurt-headquartered Rantum Capital is eyeing a first close of €80 million on its debut mezzanine debt fund by year end, a source with knowledge of the situation said.

Launched in 2013, Rantum Mittelstand Capital I has secured the commitment of a pension fund as an anchor investor. In addition, Rantum has eight commitments totalling €40 million sitting in a ‘white pool’ ready to make in early 2015, once a first close has been held, the source said.

The fund is targeting between €100 million to €200 million for a blind pool on top of the €40 million white pool.

Structured as a separate investment fund, the white pool includes unsecured subordinated loans which the firm is ready to extend to small and medium-sized enterprises (Mittelstand) companies in Germany, the biggest of which are two €10 million loans to an industrial company and a hotel and lodging buisness. The portfolio includes companies with EBITDAs ranging between roughly €1 million to €70 million and net debt to EBITDA of up to 3.5 times. The fund will make between 20 and 30 investments.

At first closing, investors will be entitled to take up a pro rata share of the white pool in addition to commitment to the fund. The fund is targeting cash yields of 10 to 20 percent on loan terms of five to 10 year terms and net returns of 10 to 12 percent. It is understood that the loans cannot be repaid within five years.

Amala Partners is acting as placement agent for Rantum Capital, sources said.

Rantum Capital and Amala Partners declined to comment.

Alternative lenders have found Germany’s SME lending market one of the most difficult in Europe to break in to, particularly given the strong cultural relationship between the Mittelstand and its traditional domestic banking community.

However, German banks are coming under increasing pressure because of a squeeze on margins amid a competitive lending environment. Favourable interest rates also mean public and private funding markets are attractive, including the German Schuldschein and US private placement markets, S&P said. Growth in the export market for Mittelstand companies is also expected to be more benign than previously in the coming years.

New German tax rules, first introduced two years ago and aimed at easing lending restrictions, will ensure that certain subordinated loans can now classify as equity in bank ratings, thus enhancing the credit profiles of companies, and enabling them to get access to more senior debt at attractive interest rates.

When launched in early 2013, Rantum said that German Mittelstand companies have lower equity ratios than comparable companies in other countries. Thus equity ratios of “hardly more than 20 percent frequently do not allow for headroom to secure sufficient bank loans for corporate development,” the firm said at the time. The unsecured loans the firm plans to provide “will be structured as a subordinated loan, the cost of capital partly linked to the economic success of the financed company. This is thought to ensure that the financing can be classified as equity from the perspective of banks and rating agencies,” it said.

The interest of the loan is also tax deductible for the borrower which reduces the effective interest rate, sources said.

Rantum has completed a number of investments in the last nine months funded with a mixture of partners’ capital and investment by third parties on a deal by deal basis. The firm was founded by 13 partners, mainly German entrepreneurs including a former chief risk officer of Commerzbank, Wolfgang Hartmann. Its managing directors include Dr Dirk Notheis, previously chief executive of Morgan Stanley Bank, Marc Pahlow, previously of the Carlyle Group, and Carsten Olberding, previously director of mezzanine at Hamburg Savings Bank.