For buyers, middle-market lending sources are more than available. The increased availability of financing makes the landscape very competitive from a lender’s perspective. However, lenders that specialize in a targeted industry or offer flexible debt solutions are more likely to maneuver through the competitiveness, potentially sealing a deal with dealmakers looking for funding. Multiple firms have raised loan funds this year, in particular mezzanine funding.
The rising popularity of mezzanine funds is more apparent now than in recent years. In November, the Carlyle Group LP (Nasdaq: CG) doubled down on its commitment to the energy sector by raising a $2.8 billion mezzanine fund. The credit fund was twice the size of the firm’s inaugural $1.4 billion energy fund in 2012.
Joining Carlyle in recent mezzanine fundraising efforts, the Audax Group raised its fourth fund valued at $1.2 billion to invest in middle-market companies across a variety of industries, including: aerospace and defense, consumer, health care, logistics, manufacturing and software.
The resurgence of mezzanine financing is largely driven by the increased regulation of commercial banks and the poor stock performance of business development companies (BDCs), according to Five Points Capital’s Brent Kulman. With BDCs, unitranche financing and aggressive senior debt lending pulling back, dealmakers began tapping into mezzanine funds while valuations were strong.
Many BDCs pulled back from the market at the end of 2015 because their stock price “dropped below where they were able to invest from,” according to according to Anne Vazquez, a partner at NewSpring Capital. In 2016, Vazquez says NewSpring Capital has seen a lot of activity in its mezzanine debt fund, largely due to the debt recapitalization market. The Radnor, Pennsylvania-based firm has approximately 46 portfolio companies out of its mezzanine debt offerings. Vazquez reports that the resurgence has slowed down a bit with BDCs making a comeback.
As 2016 moved along, BDCs regained some momentum after some had done larger, riskier deals and made mistakes within a volatile energy sector, says OFS Capital’s Marsha Zebley. In fact, BDC Capital Credit launched a BDC to make senior investments, including mezzanine and unitranche, in middle-market companies. While the climate had been challenging for some, BDC share prices – tied closely to the stock market – have been rising over recent months.