A two pronged strategy

The Emperor Napoleon Bonaparte was fond of a strategy whereby a part of his force would act as bait, luring the enemy into an assault, after which the French’s flanking force would attack from the flanks or rear. Most famously employed (by Napoleon) at the Battle of Austerlitz, it’s been a popular tactic throughout history. And the twopronged attack also appears to have found favour with one of Europe’s up-and-coming asset managers.

Paris-headquartered Idinvest, which spun out of Allianz exactly four years ago in May 2010, is in the process of raising two new private debt funds targeting the mezzanine and senior debt segments of the European market respectively.

It has already held a first close on Idinvest Private Debt III, its mezzanine vehicle, which shares a €300 million target with its senior sibling, Idinvest Dette Senior II. The latter has a hard cap of €350 million, according to chief executive Christophe Bavière.

Idinvest’s first senior debt fund raised €281 million last year and is already 70 percent deployed across 23 deals. To date, based on all loans being repaid at term, it has delivered a Euribor +514 bps return, although margins have compressed and the overall return is likely to decrease slightly once the remaining 30 percent is deployed, Bavière suggested.

Meanwhile, its latest mezzanine fund, Idinvest Private Debt III, has raced to a first close on €120 million as it too pursues a €300 million target. The fund launched in February and has already achieved a first close following commitments from French investors. It’s a significant achievement in light of the challenges facing European mezzanine investors. Assailed by the rise of unitranche as a financing product and with margins compressing below the level promised to LPs during fundraising, mezzanine investors have had to be resourceful to gainfully deploy capital.

Larger groups like ICG have stretched the definition of mezzanine to its limit, sweetening returns with equity co-investments and hybrid structures.

Idinvest takes a different view. The firm, which also pursues several private equityrelated strategies, remains resolutely focused on the smaller end of the European mid-market where there is less competition. Bavière’s thesis is that younger companies in an earlier stage of investment and undergoing higher
growth than more established businesses are better suited to mezzanine. Idinvest’s mezzanine deals are typically structured with a PIK element which frees up cashflow to expend on growth. Returns are then sweetened on exit with the addition of warrants.

Once established, those same businesses then better suit senior debt financing, where Idinvest’s other core private debt fund comes in.

Idinvest hopes to conclude the bulk of the fundraising by the summer, with commitments expected to come from further French LPs along with other European investors. After that, the firm will look to bring on board LPs from further afield, Bavière said.

It will target investments in high quality European mid-market businesses, with ticket sizes likely to be up to €30 million. Its primary focus will be on sponsor-backed companies, but it will also look to directly back corporates in certain cases, or opportunistically invest in debt on the secondary market, according to investor presentation materials.

The fund will target returns of 12 percent, based on a 6 percent cash coupon and 6 percent PIK element, with warrants offering the potential for further upside. Risk will be mitigated by applying conservative leverage ratios at c.4x debt to EBITDA in deals with a significant equity contribution from a sponsor of around 50 percent.

Proceeds will be systematically distributed rather than recycled, and there will be no leverage in the fund. The term of the fund is eight years, subject to two one-year extensions, with an investment period of three years, (also subject to two one-year extensions). The management fee, charged on deployed capital, will be 1.3 percent with carry of 15 percent and a hurdle of 6.5 percent.

The firm then is offering LPs a choice – higher returns, and higher (but still heavily mitigated) risk with the mezzanine vehicle, and lower but more certain returns with the senior debt vehicle. It’s a sensible ploy and one which appears to be bearing fruit. Increasingly mezzanine fund managers are looking to complement their core products with other offerings that play elsewhere in the capital structure.

Idinvest has grown rapidly since spinning out of Allianz four years ago, more than doubling its team from 25 in 2010 and growing assets under management from €2.5 billion to €4.3 billion today. The firm expects to reach €5 billion by year end, aided by its two-pronged approach to private debt.