What is the environment like for mezzanine investments?
There are a lot of interesting opportunities, and we’re in the process of making a handful of investments now. There are things that are interesting to invest in, but its challenging given the strength of the high yield bond market.
What kind of activity are you seeing?
There’s [a lot of activity] around more complicated refinancings for existing companies, rather than new buyouts. That’ll be an incredibly fertile area over the next few years. There are plenty of companies that have the wrong capital structure but that are fundamentally good businesses that will need junior debt to finance themselves.
Why are there big opportunities in refinancing company debt?
Coming out of the crisis, there were plenty of businesses that did amend and extend refinancings in high yield, and there’s a big group of companies that now have to address looming maturities and looming covenant pressure. They are not necessarily distressed businesses, but their debt structures are difficult to replicate in today’s market. As a result, some will have to recut their capital structures and introduce junior tranches of debt. Our mezzanine business focuses on performing businesses, but you can have a business where the underlying company has performed fine but the capital structure is too levered.
What kind of appetite do LPs have for mezzanine exposure?
LPs like the mixture of current income, or yield that you get from mezzanine, combined with the upside you get from equity participation and other components of the deal. It’s an interesting way for people to get more return than they do from most mezzanine products but with less risk than a straightforward private equity product. Mezzanine sits nicely in a portfolio along with other asset classes.