Looking down from the mezzanine
The Mezzanine Market Perspective for the third quarter of 2018 is now available. As SPS has indicated for quite some time, mezzanine transactions continue to depreciate year-over year, including a 41.6% drop in activity for the twelve-month period ending June 2018.
What is causing this decline? It is difficult to say, but this type of debt financing is a risky, albeit lucrative investment. Earlier this year, we highlighted this article, Mezzanine managers losing places at table, in P&I as a good reference for current trends in the market. As more investors offer other sources of private financing, mezzanine debt will continue to face steep competition and pricing pressure.
What are the current numbers?
When comparing Q2 2018 with Q2 2017, mezzanine activity is down 50.4%. Moreover, of the 59 completed mezzanine transactions in the second quarter of 2018, 69.5% involved a sponsor, compared to 76% last quarter. While there is a weakening in sponsor-backed mezzanine transactions, nearly 70% is still a robust number of deals that involve private equity investors. Looking at it from the reverse perspective, 7.6% of new platform equity investments in Q2 had a mezzanine component, compared to 13.4% in Q2 2017. That’s nearly a 50% drop for sponsors utilizing mezzanine debt. This is imaginable when you consider the various forms of financing available and the aggressive and booming credit market.
Is this an opportunity for mezzanine managers?
As the credit market continues to advance and fundraising reaches record highs, mezzanine investors will need to consider their options. As noted in P&I, these investors should be “selective” in the types of investments and business they consider deploying capital with. Axios published an interesting piece this month, which might serve as a cautionary tale for investors to do their due diligence when deploying capital. Fortunately, SPS can help investors to source more quality deals that fit within their criteria and ultimately achieve higher returns.
Having a core, reliable strategy in place will enable investors to stick around for the long term, even after the credit market subsides, with a robust pipeline in place. Engaging the SPS Lender Portal, an interactive data and business development platform, will optimize and improve deal sourcing by maximizing your market coverage of relevant deal flow. The Portal provides mezzanine lenders access to new deal sources, CRM integration, market coverage analysis, transaction data, mobile networking, and more. To learn more about the SPS Portal for lenders, please contact us.
Last week’s deals today
November 5 – 9, 2018
~109 deals traded
Deal of the week
Broadcom Ltd. completed its acquisition of CA Technologies last week for $18.9B. The New York based CA Technologies develops, markets, delivers, and licenses software products and services through three segments: Mainframe Solutions, Enterprise Solutions, and Services. Qatalyst Partners acted as the sell-side intermediary and Wilson Sonsini Goodrich & Rosati provided sell-side legal services.
Most active subsectors
- IT: Software & services
- Industrial: Equipment & products
- Financial: Insurance
- IT: Services
- Media: Marketing & sales services
Most active cities
- New York