I recently spoke a mid-market lending source about what (if anything) is going on in the debt world. I walked away with a few themes worth sharing.
1. Sponsors are raising captive mezzanine funds to finance their own deals. It’s a phenomenon I touched on a few months ago when peHUB reported Insight Equity is raising a mezzanine fund alongside its new buyout fund. The firm is requiring a 1:1 commitment to the equity and the mezzanine fund for new LPs. Then, I read that KRG Capital is raising a captive mezz fund as well. And of course ABRY, Summit Partners and TA Associates have been doing it for some time now. There are several arguments regarding this move. For one, with mezzanine so expensive (we’re talking anywhere from 16% to as high as 20%), sponsors are thinking, why give away the upside to someone else? Furthermore, mezzanine is only slightly less risky than equity, so why rely on others to get deals done if we can have no-contingency financing at our fingertips? But as one sponsor told me, “I’ve never in my life had trouble finding mezzanine debt, so why would I want to attempt to arrange it myself for the very first time?” Not to mention, this is essentially doubling your exposure to a deal. All valid points.
2. The ceiling deal value is around $150 million. Most lenders aren’t willing to hold more than