European mezzanine surges

European mezzanine investment in the first half of 2003 more than doubled to E3bn compared with E1.3bn in the same period in 2002, according to a new report.

Mezzanine financing continues to increase its role in European LBO activity, according to a report published by UK-based Mezzanine Management and research firm Initiative Europe. The report reveals that in the 12 months to June 2003, there was the most activity ever in the European mezzanine market. On an annualised basis, the European mezzanine market would therefore be valued at E6.9bn, compared to E5.1bn for the twelve months to December 2002 and E3.4bn in the 12 months to June 2002.


The total value of deals that included mezzanine increased by 97 per cent in the first half of this year. In total, mezzanine investment in Europe more than doubled to E3.05bn compared with E1.28bn in the same period in 2002.


Almost a quarter of all European buyouts included mezzanine in the first six months of the year, compared to only 17 per cent in the same period last year. The total value of deals including mezzanine in the financing mix grew by 97 per cent to E18.3bn in the first six months of 2003, compared with E9.3bn the previous year.


A number of factors have helped drive this surge in mezzanine activity. One is the increased appetite amongst investors for mezzanine product as reflected in recent successful fundraising campaigns from Intermediate Capital Group and Mezzanine Management.  Another is the increased likelihood of needing a significant layer of mezzanine in a European LBO transaction: with bankers remaining wary of providing debt at the kind of multiples that arose a few years ago, mezzanine has gained in importance. For example, the E1.5bn secondary buyout of UK DIY retailer Focus Wickes included a E345m mezzanine note, whilst the E1.9bn secondary buyout of bingo operator Gala was financed with E290m of mezzanine.


Mezzanine investment in Continental Europe has also grown significantly. Investment in France and Benelux has doubled and Southern Europe tripled as a percentage of overall market share. The UK remains the largest mezzanine market in Europe, accounting for 35 per cent of the total amount invested, with France and Germany accounting for 29 per cent and 21 per cent respectively.


“The increase in LBO activity has undoubtedly fuelled some of the growth in the European mezzanine market,” said Rory Brooks, founder director of Mezzanine Management. “In addition, the size of mezzanine strips in some of the recent LBOs points to the greater depth and liquidity of the mezzanine market compared to a few years ago.”