Kleinwort Benson Mezzanine goes its own way: The possibility of conflict with the parent organisation has led Kleinwort Benson M

Kleinwort Benson Mezzanine Capital (KBMC) has held a euro 170 million first closing for its third European mezzanine fund.

Although the new fund is being raised under the aegis of Dresdner Kleinwort Benson, a mechanism is in place whereby the management of the fund will be transferred to an independent management company owned by senior KBMC executives Richard Collins, Kevin Murphy, Martin Stringfellow and Christopher Howe. Christopher Howe said this move is designed to enable KBEMF III and future funds to avoid conflict with other DKB activities in the private equity arena; DKB will, however, maintain an involvement as an investor in the fund.

The new management company is currently awaiting IMRO approval.

Eight LPs signed up to Kleinwort Benson European Mezzanine Fund III (KBEMF III) at the first close. Although investors in previous KBMC funds predominate, among them IBM Retirement Fund, BancBoston Capital and the MONY Group, the firm has also succeeded in attracting prominent new participants including Brinson and Washington State Investment Board. US investors provided roughly two thirds of the first closing capital, with the balance being drawn from a mixture of European and Far Eastern sources.

Two non-US institutions, currently in the due diligence phase, have expressed interest sufficient to take the vehicle to its euro 200 million target.

Howe expects that the fund will exceed its original target at the final close, tentatively scheduled for the second half of October. The new fund will have a significantly smaller investor group than its predecessor perhaps a dozen LPs, compared with KBEMF II’s 20-strong line-up. Howe explains that this is a deliberate policy on KBMC’s part. “We are seeking fewer investors, but aim to establish closer relationships within that limited group, as well as to offer fund participants chunky co-investment opportunities where appropriate.”

KBEMF II raised GBP141.5 million in 1995 but, because of a recycling facility for capital recovered within 12 months of each investment, in effect had a capacity of approximately GBP160 million. Around GBP20 million of KBEMF II remains available for follow-on investments.

Because awareness of, and demand for, mezzanine tends to develop in step with buyout activity, KBMC expects the new fund to be deployed mainly in Germany, France and the UK. Nevertheless, the group also anticipates that KBEMF III may see more deal flow from Spain and Italy than its predecessors. The Scandinavian markets, where KBMC has historically been active, may also throw up opportunities, though Howe expects fewer than in the past.

KBMC is confident that mezzanine is fundamentally a growing market. The new fund deliberately pitched just slightly larger than KBEMF II’, Howe explains will continue KBMC’s sole focus on mid-sized companies, a sector that is essentially unaffected by the vagaries of the high-yield market.

Recapitalisations were the biggest single source of deals for KBEMF II, absorbing 50 per cent of the total deployed, followed by buyouts, which consumed a further 35 per cent. The balance was invested in expansion financings, buy-ins and secondary buyouts. Howe says that KBMC is keen to do more expansion deals and consolidation plays, although these are harder areas both to identify and to market to’.

Although KBMC invests the bulk of its funds in the form of subordinated debt, the vehicles also buy institutional equity: typically such investments would be split four or five to one between a warrant-bearing mezzanine strip and a mixture of prefs, loan stock and equity. As a result, Howe says, KBEMF III will be skewed towards the equity end of mezzanine in terms of target returns and risk profile’.

KBEMF III’s first deal, a GBP7 million loan for BUE Marine, closed in July.