Mezzanine Management gears up for direct lending fund

Mariia Bondarenko
01 June 2020

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CEE-focused GP Mezzanine Management is preparing the launch of a direct lending fund to help fill the gap between bank financing and private equity capital in the mid-market in central Europe, Unquote has learned.

As the fund is still in pre-marketing, the name and the target have not been finalised yet. However, the GP is considering €400m as an appropriate target, it said.

Mezzanine Management is aiming to hold a first close before year-end. The vehicle will have a seven-year lifecycle with a three-year investment period. The GP will have the ability to recycle funds during the investment period. The fund will target a net IRR in the high single-digits.

No placement agent is being used.

The fund will invest in a diversified portfolio of secured income-generating debt instruments in small and medium-sized companies in central Europe that are seeking to grow organically, acquisitively or to refinance existing bank debt. Lending will predominantly be in floating-rate senior secured first-lien loans, as well as unitranche and second-lien instruments, all of which will feature a comprehensive security package and covenants.

The GP's traditional target investments will remain the same, namely medium-sized businesses with EBITDA of €3-50m and revenues of at least €20m. The fund will have a generalist approach covering a variety of sectors.

The vehicle will provide secured loan instruments to finance growth capital injections, leveraged/management buyouts and special situations (for instance, shareholder buyouts). Funding may also be used for capex, add-on acquisitions, working capital or to recapitalise balance sheets.

The typical ticket size will be €10-40m per investment, with the sweet spot at €15-20m. The GP plans to make 25-35 investments.

The GP said CEE remains significantly underserved in terms of alternatives to traditional bank lending. While the acceptance and deployment of private equity in the region has gradually increased over the last two decades and is now accepted as an established asset class, it argues that direct lending is still significantly underrepresented compared to levels seen in the US or western Europe.

The expected further convergence of the region to those developed markets and the increasing understanding and appetite for alternative financing solutions among medium-sized businesses (coupled with high levels of private equity dry powder, further regulatory pressures on the banking sector and moderate competition in the segment) all support the market opportunity in direct lending in central Europe, it added.

Mezzanine Management expects to welcome a number of investors that have already supported several of its funds, including insurance companies, pension funds, IFIs such as the European Investment Fund and the European Bank for Reconstruction and Development, asset managers and family offices.

Geographically, the majority of investors in other Mezzanine Management funds have come from Europe, with US investors the second most prevalent group. The GP expects a similar breakdown in its new fund.