Preqin: Mezzanine Funds Still Popular Among Private Debt Investors

Aug 15 2017 | 7:40pm ET

Private debt investors consider mezzanine funds among the most promising segments of the market, according to new research from Preqin, although last year’s record level of mezzanine fundraising is unlikely to be eclipsed this year. 

Mezzanine funds accounted for greatest proportion of active investor mandates in July 2017, according to a recent Preqin survey of 53 private debt investors, as nearly half of respondents believing they offer the best risk/return profile and 40% saying they offer the best opportunities at the moment. However, following 2016's record $31 billion in allocations across 43 vehicles devoted to the type, the number of mezzanine funds in the market is declining. 

The research was published in Preqin’s August 2017 Private Debt Spotlight. Key highlights:

  • While four out of ten private debt investors said mezzanine funds currently offer the best opportunities, 62% said direct lending and 32% distressed debt. 

  • 41% of active investor mandates tracked by Preqin in July 2017 were for mezzanine funds, more than were for direct lending (37%) or distressed debt (34%). 

  • Mezzanine funds have outperformed distressed debt across investment horizons by median net IRR: they returned an annualized 12.2% in the five years to September 2016, and exceeded overall returns for private debt funds (11%) in the same time period. 

  • 2017 does not look set to match last year’s numbers: in the first seven months of the year, 18 mezzanine funds have raised just $4 billion. 

  • At the same time, the number of funds in market declined by 11% in the 12 months from June 2016, and aggregate capital targets declined by 55%. This suggests new large funds are not being launched to replace funds that closed in 2016. 

“Despite being a longstanding element of the private debt industry, market share for mezzanine funds has fallen behind that of distressed debt and direct lending in recent years,” observed Ryan Flanders, head of private debt products for Preqin, in a statement. “However, Preqin’s latest surveys find that investor sentiment towards mezzanine vehicles is very favorable, with investors seeing it as one of the most attractive private debt fund types at present.”

“However, [last year] saw the closure of most of the largest funds that were seeking investment, and fewer new large funds have come to market to meet investor demand,” he continued. “As such, momentum for mezzanine fundraising seems to have stalled in 2017 so far, despite positive investor sentiment. If new mezzanine vehicles are launched in the remainder of the year, it seems that the high level of investor appetite indicated by Preqin’s survey could assist in their fundraising efforts.” 

Founded in 2003, Preqin is a leading source of information for the alternative assets industry, providing data and analysis via online databases, publications and bespoke data requests. The company's Hedge Fund Online service is a leading source of intelligence on the hedge fund industry, with performance information for over 16,000 hedge funds across strategies and geographies. More than 47,000 professionals in 90 nations use the company’s products.

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