Out-Law News 2 min. read
12 Mar 2013, 2:44 pm
The research, from investment firm Partners Group (12-page / 1.1MB PDF), assessed the performance of mezzanine debt funds over a 21-year period. Aggregate returns on the 439 funds observed never dropped below their combined value in any given year, while total returns amounted to 1.59 times the pooled value of the investments, according to the report.
However, the study reported that "meaningful volatility" for the investments did exist, with some funds losing value over given investment years. Partners Group said that this volatility could have been "meaningfully reduced" by investing over multiple years. In total, mezzanine investors lost a "relatively low" 1.8% of their investments each year between 1989 and 2009, the report said.
Mezzanine finance is an unsecured form of debt, representing a claim on company assets ranked only above common shares. It is considered to be of higher risk than more traditional forms of investment due to its unsecured ranking; however it provides a higher investment return than secured or more senior lending.
According to the Partners Group report, there were seven years over the period of its analysis during which none of the funds which matured resulted in a loss for the investor. However, when the market was at its most volatile in 1991 and 1999, 19% or more of the funds which matured resulted in a loss. Some funds continued to perform well, though, meaning that even where individual funds performed poorly investors experienced gains overall.
"Perhaps most importantly, although losses did have a significant impact, all investment years continues to show positive overall returns," the report said. "For example, for the two weakest vintage years, 1992 and 2006, which had loss rates of 13% and 13.5%, respectively, investors still achieved overall investment returns of 1.29x and 1.42x, respectively."
"By constructing portfolios across multiple investment years, investors may be able to reduce this volatility while continuing to deliver consistent investment returns. The mezzanine asset class not only delivers strong risk-adjusted returns to investors across economic cycles, but also protects returns during rising interest rate environments due to its floating base rates," the report said.
Partners Group concluded that the "favourable characteristics" of mezzanine debt could "be expected to foster interest in mezzanine as a separate asset class".
Data provider Dealogic has reported a decrease in popularity in mezzanine debt as a means of finance in private equity deals, with Financial News reporting a drop in issuance from $19.9 billion in 2007 to $2.3bn in 2010 and $1.5bn last year. However, investment funds expert Daniel Greenaway of Pinsent Masons, the law firm behind Out-Law.com, said that interest in mezzanine debt was starting to grow again.
"We have certainly noticed that investors are increasingly interested in credit again across direct lending, credit opportunities and mezzanine," he said. "The ability to enhance returns with fund leveraging, which has in recent months become more available, has certainly been helpful for closed-ended debt funds and CLO funds."
