More than mezzanine

Spend a few hours with Rory Brooks at his firm's Covent Garden offices in London, and you probably won't just talk shop. Investing in buyouts is of course a subject he cares about, as is Mezzanine Management, the investment firm he co-founded in 1988. But there are other things that matter too, and Brooks is likely to move onto at least some of them.

Not that you'd find “Brooks on business” boring, mind. Nor does the man himself appear to find the subject tedious. A founding father of the European mezzanine market, Brooks tells great tales about way back when it all began. He has views on what it takes to succeed in mezzanine today, and he is eager to talk about what is driving the firm 16 years after it opened for business. First things first, you might say – but do make sure there is time to touch on some of the finer, less businesslike things in life as well.

TWO BANKERS BACK IN LONDON
Brooks, a native Briton, became a mezzanine specialist during a 13-year stint at Bank Boston, nine of which he spent working in Boston and New York. While in America, he became friends with Jim Read, a US banker employed by Toronto Dominion, who soon after, in 1985, transferred to London. Brooks himself returned home two years later, calling on his friend Read for a first-hand account of how the City had changed during his absence.

London in the late 1980s must have been a strange place for the two men, a kind of no-man's-land for anyone involved in supplying what has been dubbed expensive debt but cheap equity. Brooks says the term “mezzanine” was just about in use at the time, but the middle layer of a capital structure was essentially still a big blank space on the map of most London financial institutions. In the US, he and Read had seen intermediate capital, especially high yield debt, become big business. Now they discovered that nothing even remotely like it existed in the UK.

I realised in the early 1980s that I wasn't long-term comfortable with working within a hierarchical structure

Their epiphany came shortly after Brooks' return to London. The pair worked on a deal that involved syndicating a £7.5 million piece of mezzanine. The deal took four months to complete. To put this in perspective: at the same time these bankers in London were sweating to shift £7.5 million of stuck money, New York's high yield machine Drexel Burnham Lambert was pushing a $5 billion financing through the market in just four weeks.

In hindsight, it seems an opportunity impossible not to have spotted. It probably wasn't so obvious back then. Still, as Brooks recalls: “Jim and I thought this was crazy. There was quite a lot of bank debt in the London market, an increasing amount of private equity and absolutely nothing in between. Two-over-cost-of-funds money was rubbing shoulders with 35 percent IRR money, and we felt that was not a particularly efficient construct. There just had to be an opportunity.” Nights were spent in Read's living room and Brooks' kitchen to work out how to capitalise on it.

Brooks relished the prospect of setting up his own business. The idea of pioneering in a new market as well as the chance to generate more than just a salary were part of the attraction too, but the main motive was to become his own boss. He insists: “I realised in the early 1980s that long-term I wasn't comfortable with working within a hierarchical structure. The issue wasn't the bank I was with; the issue was me. What I really wanted was independence.”

To get there, he and Read needed capital. They took the idea to several organisations including Drexel, which had just moved an entire corporate finance team from New York to London to lead a push into the UK. Drexel agreed to help raise a fund. By the end of 1988, the budding mezzanine meisters found themselves with their own management company and a £200 million fund, one of the largest private placements ever completed in the UK at that time. Mezzanine Management (MM) had arrived.

Brooks says he'd had a strong sense of the risks involved in setting out on his own. During the fundraising, these risks became “absolutely magnified”. It became clear, for example, just how much work it would be to educate the market about this novel product mezzanine.

There was also that question mark hanging over Drexel: the firm had long been under intense scrutiny from the SEC and as chance would have it, the firm's franchise- destroying indictment came just ten days after the Mezzanine Management fund closed. “We couldn't have raised the fund without them,” reflects Brooks. “They did a great job for us but it's hard to predict what the consequences would have been if the indictment had happened earlier.”

CARVING OUT A NICHE
Another key challenge was to create a business model that would give the firm a sustainable market position. Mezzanine Management might have been first into Europe's embryonic mezzanine market, but others – Intermediate Capital Group, which opened in 1989, GE Capital and several London-based banks for example – weren't slow to follow suit.

Brooks says it took two to three years to hone Mezzanine Management's strategy and that its key differentiators haven't changed much since then. Some parts of it evolved by design; others resulted from events in the market. Still others, such as the fact that the firm would soon develop a taste for investing in transatlantic deals, had to do with the personal circumstances of the two founders.

Today, Mezzanine Management specialises in doing three distinct types of deals. Its bread and butter business is to act as the main – if not the only – mezzanine provider to medium-sized, private equity backed buyouts. Secondly, the firm invests a mix of mainly mezzanine and possibly some equity in sponsorless deals that are preferably sourced on a proprietary basis. Finally, it selectively participates in the syndication market, investing alongside other mezzanine houses in large leveraged buyouts.

Brooks makes no bones about the fact that he isn't too big a fan of playing in that last field, which he describes as both cyclical and crowded. “Large syndicated mezzanine comes and goes, and the pricing on the risk doesn't always seem to be attractive. Plus this is not necessarily the best way for us to add value. Some of our more sophisticated investors can get to this paper directly. We like to invest a portion of each fund here, but not a whole book.”

Neither does big syndicated mezz let them do what a competitor says MM enjoys doing most: participate in the equity. Brooks confirms that this is another important part of the strategy: “We learned early on not to be shy about doing equity when the opportunity presents itself – on the condition that you never cannibalise somebody else's equity.”

To illustrate, Brooks recalls one of the firm's earliest investments, a sponsorless deal requiring mainly mezz with a little bit of equity put into a small industrial business in the UK as part of an acquisition by a private US trade buyer. Soon after, in the recession of the late 1980s, the new owners hit the ropes. The forced sale of the US operation left the UK business as a rump. “Someone made an offer for it, but when we realised that it wouldn't require much money to buy this business, we said, “Why don't we buy it? This thing is waiting to be done, and we already know the company from the inside.” Next thing we knew, we owned 100 percent of the equity.”

The investment proved a success, and the firm has done a string of similar deals since then. Its emphasis on doing equity as well as mezz has played an important part in the firm's development.

NOT JUST JIM & RORY
Today, Mezzanine Management has offices in London, Stamford (Connecticut), Paris, Frankfurt, Vienna, Warsaw and Budapest (the latter three being for MM's CEE fund, of which more later). It has invested over a $1 billion in more than 75 transactions and, according to Brooks, has generated a 27 percent 15-year gross IRR from 45 realisations.

Mezzanine Management, in other words, has been a success. Brooks and Read have benefited personally and are both financially secure. Is it time to ease off? Brooks, who turned 50 this year, certainly doesn't look like a man who is about to retire. “Honestly, I'm trying to slow down, but apparently I come across as a guy who appears to have some energy left. I've got to use it somewhere,” he laughs.

And work is where he says he uses most of it. Mezzanine Management is preparing to raise a new fund, which is the beginning of another investment cycle that could take Brooks and Read well into their sixties.

Another long-term move is Mezzanine Management's groundbreaking expansion into Central and Eastern Europe, marked last year with the closing of the €114 million Accession Mezzanine Fund. Raising the fund was pretty hard work, and although it is run by a dedicated management team based in Vienna, Brooks says the project reminds him of what it was like to build up the firm's original operation 16 years ago.

“This is not the first time we've been the first, and if the market does get more competitive, the Accession Mezzanine team can take advantage of our experience in taking strategic steps to protect our position. But for the time being, it's once again all about educating the market, explaining what's going on and finding that deals fall down because people don't understand how things work. We're still having to rewrite every intercreditor document in Central Europe, whereas here they just come out of your PC now.”

The difference now for Brooks personally is that he no longer is having to do the writing. His enthusiasm for Mezzanine Management seems undiminished, but he also speaks of a desire, as well as the necessity, for the firm's founders to change the way they work.

Investors have also asked where the firm will go from here and how the founders' roles will evolve, questions that Brooks says are absolutely reasonable. “Inevitably, Jim's and my energies will change, and we need to be strategic in our thinking. It's less about madly running around the planet, staying up with the lawyers until three in the morning, and more about letting more of the day-to-day management be handled by our investment team. The firm is getting bigger, and I can't have 35 direct reports anymore. I'd go mad and blind, and the firm would grind to a halt.”

Brooks says the grooming of Mezzanine Management's next generation of leaders is underway. “This is no longer just the “Jim & Rory Show”. We have good people in their thirties and forties who are fully-fledged deal managers in their own right, and they have been given the opportunity to spread their wings. We want this to be a collegiate process, but it is also meant to be a challenge.”

CHANGE
Brooks chooses a telling way to illustrate how Mezzanine Management has become more than just the two founders' personal networks by citing the firm's annual golf and tennis tournament, held in June this year for the 13th time. The event, held at Wentworth in Surrey, has become something of a classic not just among UK private equity pros: Mezzanine Management has a reputation for doing good entertainment. Says Brooks: “Jim and I go to this and, to be quite blunt about it, we only know about half the people there. At first I was a little discouraged by it, but then we realised how excellent that is. It means we're a company with a team of people who have their own business relationships. The guests coming to the golf day reflect the generational change in progress.”

If the gradual shift of influence in favour of younger, newer decision-makers works out as planned, Brooks will be able to spend more time on some of the other things going on in his life. There are many. Married with two children, Brooks is chairman of a group of London restaurants and is a supporter of Intelligenc€2, a debating forum.

His charity work focuses on cancer research. He says meeting the man who discovered the gene responsible for breast cancer left a lasting impression. Brooks and his wife, Elizabeth, support the Everyman Centre, a male cancer charity that is part of the Institute of Cancer Research. In 2004, the pair sponsored a concert at London's Royal Festival Hall, featuring conductor Vladmiri Ashkenazy and pianist Evgeny Kissin – “hands from God; the man is amazing” – which raised £300,000 for Everyman.

It was the sort of evening Brooks enjoys. “I like to make sure there is an event around the charity work we do, to bring a social aspect to it and to reach a larger audience. The Festival Hall was packed with hundreds of middle-aged men whose wives were going, “Right, you are going to the doctor tomorrow.”” By the way, Brooks continues, if there is anything else he can do during this interview, it is tell this journalist and the accompanying photographer to go and get their checks done too.

It is clear that Brooks, who also supports the Prince of Wales's Prince's Trust and has endowed a chair in entrepreneurial studies at the University of Manchester Institute of Science and Technology, is keen to continue to work with these and other causes. Adjusting his role at Mezzanine Management will allow him to do just that.

DIFFERENT COLOURS
Less time at the office may even free up some time to do some more modelling. Yes: modelling. Brooks has for a number of years been on the books of Models 1, a leading European agency that also works with Ali MacGraw, Patsy Kensit, Faye Dunaway and Christopher Lee. To blame is a photographer Brooks hired in 1999 when, during a fundraising campaign, he spent most of his time away from his family in New York. “It was difficult: the family hadn't seen me for almost a year. So I thought I'd send home a portrait of a day of my life in New York, getting up in the morning, being in meetings, that sort of thing.”

The photographer, with whom Brooks remains close friends, gave some of the pictures to a friend in the modelling business, and before long Brooks received a phone call. Was it a tough decision? “Think about it,” he says. “You're a business man in your mid-forties getting a call from a leading model agency asking you to come on a photo shoot. It took me three seconds to think about it.”

Brooks' photograph has since appeared in numerous publications that are very different to private equity pitch books. It made his mother very proud, he says, and investors – amongst others – have teased their mezzanine man about the alternative career that clearly seemed on offer.

Obviously Brooks never thought about packing in his day job to stroll along the world's catwalks instead. But he did enjoy the episode. “It was a bit of fun. And of course it satisfied my vanity. I have to tell you though, the pay is better when you own a mezzanine business.” He pauses. Then, more seriously, he says: “But I think one does need to show that there is another side to one's life, and that it's not all monochrome and dull.”

He needn't worry; Rory Brooks is not monochrome. Like many other figures who are leading their firms in and around private equity, he has more facets than many. And people – investors, employees, competitors and clients – like that.