HPS closes mezz fund $1bn over target – update

HPS Investment Partners has closed its latest junior debt fund, marking one of the largest capital raises of the year and beating the firm’s previous vehicle’s total by more than $1 billion.

The New York-based firm, which spun out of JPMorgan earlier this year, said in a statement it closed its Mezzanine Partners Fund (MPF) III at $6.6 billion, passing its initial $5.5 billion goal and just edging out GSO Capital Partners’ recent $6.5 billion mezzanine fund. The HPS fund will invest in North America and western Europe, according to the statement.

“We continue to see growing demand for creative, flexible capital solutions from our corporate and private equity partners seeking scale and certainty for their financing needs,” mezzanine head Scot French said in the statement.

A spokesman for the firm could not be reached for further comment.

The Teachers’ Retirement System of Louisiana (TRSL) was among the limited partners committing to the HPS fund with a pledge of $75 million.

Arizona State Retirement System (ASRS) set up a fund-of-one with HPS also, committing $500 million to HPS-AP Mezzanine Partners III, which has a target net return of 12 percent. ASRS more than doubled its commitment from fund’s previous incarnation, the $200 million HPS-AP Mezzanine Partners II, Private Debt Investor data showed.

According to TRSL documents obtained by Private Debt Investor, a majority of MPF III’s investors are insurance companies, public and private pension plans and sovereign wealth funds. Some 70 percent of the vehicle’s capital as of October were from existing investors.

As of September, insurance companies comprise the plurality of its investors across all three mezzanine funds at 43 percent, followed by private sector pension plans at 22 percent and public sector pension plans at 16 percent.

HPS’s MPF II closed in 2013 and closed on $5.23 billion, according to PDI data. HPS’s Tuesday announcement said the second mezzanine vehicle garnered $4.4 million in equity commitments, and its investment period ended in June. Alongside the ASRS commitment, the San Francisco Employees’ Retirement System committed $75 million to the fund.

Those TRSL documents showed MPF II posted a 16.1 percent net internal rate of return. The sector claiming the largest share of the vehicle's investment was energy, with 10 percent of its levered capital. The second and third most invested industries were financial services at 8.7 percent and real estate at 7.3 percent. The largest position the fund held was in Galaxy Environmental, which consisted of 5.9 percent of the fund’s levered capital.

MPF II put 66 percent of its capital into North American companies, up from the first mezzanine fund’s 39 percent. The remaining amount for both funds, 34 percent and 39 percent, respectively, went to Europe and the rest of the world. Average leverage through the mezzanine position of the capital structure stood at 5.6 times in the second vehicle, while it was 5.1 times for MPF I.

Mezzanine vehicles have raised large amounts of money this year – both for funds that have wrapped up their fundraising and those still in market. MPF III is the latest multibillion dollar mezzanine fund to hold a final close.

Alongside GSO’s stash of cash for junior debt, Carlyle raised $2.8 billion for investments in energy companies and Blackstone locked down $4.5 billion for real estate debt. Among other mezzanine funds in market are Crescent Capital’s Mezzanine Partners Fund VII, which has raised $3.54 billion, surpassing its $3 billion target.

The total fundraising figures through the first three quarters of the year point to mezzanine’s popularity among limited partners; the strategy tops the list with $17.88 billion raised. This compares with $16.98 billion for distressed debt and $15.15 billion for senior debt.

Editor's note: The article has been updated to reflect additional information from the Teachers' Retirement System of Louisiana documents.