Kayne Anderson Shows How To Raise a $600 Million Mezz Fund In A Tough Market

Just how hard was it to raise a mezzanine fund during the financial crisis? Just ask Kayne Anderson Capital Advisors, which closed its first middle market mezzanine fund with $600 million.

Kayne Anderson Mezzanine Partners was oversubscribed by $100 million, says Dave Petrucco, co-managing partner of the fund. Investors include a mix of public and private pension funds, major insurance companies, foundations and endowments, high net worth individuals and family offices. Kayne Anderson, a Los Angeles based alternative asset manager known for its energy strategies and PE funds, did not use a placement agent. Its law firm was Weissman Wolff Bergman Coleman Grodin & Evall.

The fund will provide mezzanine capital to both PE-sponsored and unsponsored middle-market companies in various industries. Kayne Anderson Mezzanine Partners has already made six portfolio investments totaling $90 million.

Fundraising for the pool could hardly have started at a worse time. Kayne Anderson began marketing in first quarter 2009, in the midst of the financial crisis that shut down the credit markets and spurred hundreds of bank failures. “The world was ending,” Petrucco says of that time. “LPs were reeling and trying to figure out what the current state of their balance sheet were.”

Petrucco, along with Ed Cerny, also co-managing partner of the fund, had just joined Kayne Anderson from the Blackstone Group the year before. The pair had joined the firm with the intent of launching the mezz fund in the summer of 2008. “The world just got crazy and we decided not to launch immediately,” Petrucco says.

Instead, they waited six months until March of 2009 to start fundraising. “We waited until the skies weren’t clear but we felt we would find some success,” Petrucco says. “But it was hard.”

From October 2008 to summer 2009, the institutional fundraising marketplace was effectively closed, Petrucco says. So he and Cerny relied on Kayne Anderson’s relationships with high-net worth individuals and family offices. “There were a lot of meetings,” Petrucco says.

The strategy worked. In June 2009, Kayne Anderson announced the first close of the fund, which had raised $110 million at that point. Investors were mainly high-net worth individuals and family offices which, unlike the institutions, don’t really close, Petrucco says.

Petrucco also confirmed a new development in fundraising:  Many institutions are waiting until a pool’s first close before committing any funds. “People want to know you are going to make it before they give you a dollar,” he says. “A lot of people that have gone on the road have since stopped.”

So, with all these obstacles, why did Kayne Anderson fundraise?  “There are good times and bad times but at the end of day, if this is what you do, then this is what you do,” Petrucco says.

There is also a shortage of mezz funding right now. Only about eight to ten firms—including Onex, Gleacher & Co., Yukon Partners and Carlyle’s $500 million mezz fund—survived the crisis. Says Petrucco: “We get a lot of phone calls these days from people that need our help and we’re trying to help them.”