Tried looking this up. Didn’t find much. Can someone tell me something about this?
Recently met someone through family who is the MD of one of these.
What do these funds do? Why do they exist
What is the advantage of this over a normal debt/equity fund?
What kind of risks do these funds deal with. I understand that mezzanine debt in general = preferred equity.
But I’d like to know anything more about this.
mezz debt is technically subordinated but in general these funds can do a pretty wide range of things because mezzanine debt is a buzzword you can use to trick unsophisticated investors into giving you their money at high fees with lockups and such. Some middle market lending bank loans stuff like that
Preferred equity is cheap mezz. They exist to lend to companies that otherwise could not get lending from a traditional bank, or could not get as much lending from a traditional bank. Therefore, the investments are riskier and the yield is higher (generally a mix of cash interest and PIK). Mezz lenders are usually more lenient than senior lenders and will also generally take some equity in the form of a co-investment. If you want to be a lender, work for the mezz fund, but it is not a stepping stone into private equity if that is your goal.
Say you are buying a building for $1m. Bank is willing to lend you the first $500k at a 4% interest rate. That’s the senior debt. But you only have $300k in cash, so you need to borrow $200k more. Bank won’t lend to that high an LTV as it sees it as too risky, so you go talk to your local Mezz manager. He will happily lend you the $200k for Libor +10%.
If the market value of the property falls by 40%, your equity is wiped out and the Mezz guy is down 50%. The bank manager is still smiling. In this scenario, the mezz fund kicks you out and takes over running the building (provided they continue to make the senior lender whole). If the value of the property recovers to 80% of initial cost, the mezz fund can actually make a capital gain.
Notes: 1. Mezz financing can be against anything, not just real estate. 2. Preferred equity is not the same as mezz debt FYI. Or not always at least. I guess in certain circumstances they are effectively the same thing.
Root is Italian meaning “middle”.Alternate definitions include: “not sexy”.
While it may not be a route to PE, mezz debt is commonly a component of an LBO. Will have a (much) higher interest rate than the senior term loan(s), but is frequently combined with warrants. Their covenants will also be more relaxed as compared to the senior debt. Overall, I think this sounds like interesting work since you’ll be exposed to both debt and equity analysis.
Thanks for the information guys, really appreciate it.
I was wondering though. If I had to work here for a couple of years, what exit route could I be looking at.
Can this lead to the buy side?if at all?
Also, I have no experience working in finance what so ever. But I think I can land a job with my network. Just curious.
What do you mean by buyside exactly? A mezz fund manager is buyside when you think about it. You have a pot of capital to allocate and you have to asses a variety of deals and choose the ones you think have the best risk-adjusted returns.
There will be a lot of overlap between the kind of analysis you do as a mezz debt analyst looking at an asset and an equity analyst considering the same deal. I think it could be an interesting starting point for someone with no direct work experience in the industry.
Whoops! what I mean by buy side is the public equity analyst at an asset manager sort of work because that is one of the directions id be interested in pursuing.
What you say makes sense because in the end it does come down to analysing risk adjusted returns for investments regardless of what kind of security. Although I must admit that I am a little vary of starting off in something that would take me away from my future plans.(just an irrational fear i guess)
Either way, thanks for the insight.
Of course mezzanine can be a valid experience for PE, depending on the fund. Obviously not as good as say, M&A or leveraged finance from a top investment bank, but it is still good.
Some PE funds buy instruments such as mezzanine, btw.
Mezz is sexy
Okay, it’s like MILF sexy. I’ll concede that.
Once a lender, always a lender. You’ll be pigeon-holed as such. Trust me, I work in PE in leveraged buyouts. We obviously use mezz in our deals, but we’d never hire someone from a mezz fund to fill an equity role. Sorry.
Mezz funds are PE and buyside… I don’t know what some others on here are talking about.
There are tons of mezz funds that do underwriting as if they were on the equity side because in a lot of cases, the fund ends up owning the equity. Ever hear of the term “loan-to-own?” This is actually a smart strategy if you expect a downturn and like a particular asset/company.
If you’re coming from a more vanilla mezz fund then yeah I can see it being harder to switch to the equity side.
^this
Hi. I know I’m replying to this some years later, but I found your comment very interesting. Can you elaborate on that? “Once a lender, always a lender. You’ll be pigeon-holed as such”. What do you mean by that and why is it bad?
Also, why “we’d never hire someone from a mezz fund to fill an equity role” and anything you also find interesting?
Thanks a lot
I worked for a large mezz fund in the past.
The work is v interesting but it is a credit role. Some of the key aspects of equity work are missing: running a management team, running an m+a process, negotiating an SPA, running a due diligenve exercise, sitting on the board of companies… There is exposure, but in mezz those aspects are rarely present, but they are in equity.
At the end of the day, equity is a control position, but mezz isn’t. So mezz doesn’t have the perks of being in control, though it is a partner to the equity in control.
Flip side is, it can do more deals than equity.
Biggest drawback of mezz is that no one wants to borrow at 10-12% rates. Especially in low yields, and when equity returns themselves are under pressure. So always have to justify your existence.