A group of HSBC Bank Canada professionals has spun out to launch independent firm Fulcrum Capital Partners. Terms of the transaction were not disclosed.
Fulcrum will manage more than C$700 million (€508 million; $678 million) with a focus on mezzanine lending and private equity investments in mid-market businesses in Canada. The capital is split between a traditional private equity fund with external limited partners and a mezzanine pool funded solely by HSBC Bank Canada. The private equity fund held a first close on C$180 million last year and is anticipating closing on between C$200 million and C$225 million in the next six months, Fulcrum managing partner John Philp told Private Equity International.
“In the Canadian marketplace a lot of the players have exited over the course of the last two or three years, some of them because of poor performance, some because of funding issues,” Philp said. “The marketplace in Canada is actually fairly constrained with respect to mezzanine. We look at it as a great opportunity.”
Fulcrum’s private equity fund that closed last year has three current investments, while its 2005 fund that made 12 investments has nine that remain outstanding, Philp added.
Fulcrum is led by managing partners David Mullen and Neil Johansen in Vancouver and Philp in Toronto. The firm has 13 total investment professionals, all of whom come from HSBC Capital in Canada.
The mezzanine investment strategy has emerged as a popular one with limited partners as of late. KKR collected roughly $1 billion for its debut mezzanine vehicle that closed earlier this year. Other firms that have been active in the space include The Blackstone Group’s debt affiliate GSO Capital Partners, which recently closed on roughly $2.1 billion for its second GSO Capital Opportunities Fund.
The strategy has been attracting LPs because of its return potential, with expectations that internal rates of return will fall somewhere in the range of mid-to- high teens. But investors also like the “risk profile”, meaning in the case of a default, mezzanine has some protection in the capital structure. Mezzanine stands out particularly in volatile and tight credit markets where it has the potential to reap equity-like returns. With the numerous funds that have been raised around the strategy, mezzanine lenders should see a lot of competition going forward.
HSBC Capital (Canada) has provided more than C$1 billion of growth capital to more than 120 companies in industries including services, manufacturing and distribution. Fulcrum will continue deploying new private equity and mezzanine commitments while managing an existing portfolio of over 25 investments.