European mezz investment slows

While the use of mezzanine funding in non-buyout deals increased by 60 percent, the overall European level of mezzanine investment dropped to €985m in the first half of 2004.

Mezzanine investment in Europe decreased to €985 million ($1.2 billion) in the first six months of 2004, down from €1.5 billion in the second half of 2003, according to data commissioned by Mezzanine Management and compiled by Initiative Europe.

The figures reflect a quieter buyout market in the first half of 2004, with no subordinated debt tranches above €200 million and fewer of the major LBO transactions that shaped the 2003 buyout environment taking place.

In 2003, large deals such as the secondary buyout of DIY retailer Focus Wickes, which attracted a €345 million mezzanine tranche, ensured that 2003 was the second strongest year on record for European mezzanine investment.

In the first half of 2004, the UK mezzanine market fell below its counterparts in Germany and France, representing only 20 percent of total European mezzanine investment by value in the 12 months to June 2004, a decrease from 34 percent in 2003.

Despite the slowdown, mezzanine fundraising has continued at a significant pace. In May, Lehman Brothers closed its first dedicated European mezzanine fund on €750 million. GSC Partners has recently launched a €500 million European fund, expected to close in October, according to sources. And former Goldman Sachs Mezzanine Partners executive Robin Doumar is reportedly targeting an amount between €750 million and €1 billion for a new fund he is currently organising.

One market observer commented: “With the amount of money coming into the marketplace, supply side pressure is giving more concerns. New entrants in the marketplace will have to establish themselves and may be more aggressive on pricing and leverage. However, for the established mezzanine houses, there aren’t too many headaches on the supply and demand side.”

The new figures demonstrate that, without the major LBO transactions this year, subordinated debt providers are increasingly looking to the mid-market to provide growth capital to companies without equity funding.

The use of mezzanine in non-buyout deals increased by 60 percent in first half of 2004 and Q2 saw four significant mezzanine transactions that didn’t involve an equity sponsor: RBS funded a €174 million investment in Morris Homes with mezzanine and senior debt; Intermediate Capital Group provided €85 million of expansion capital to French group Picard Surgeles; Indigo Capital and Alcuin Capital raised €45 million for funding of pest control company Sorex; and Mezzanine Management put €14 million into the PTP of UK-based Integrated Dental Holdings.