Mezzanine funds gather pace

The credit crunch has seriously hindered the large LBO market in France. As a result, investors and GPs have now turned their attentions to the small- and mid-cap market in which to place their funds. Since the start of the year, the majority of deals taking place have been mainly in the early-stage and expansion sectors of the French private equity market with more than EUR90m invested in February alone.

Meanwhile GPs still seem to have the ability to raise substantial funds. With private equity firms such as Emertec, Platina, Alven Capital, I-Source and Icso 2 all launching or closing small- to mid-cap funds in the past two months there seems to be available capital for potential investments. Acto Mezzanine itself completed six deals before even staging its final close.

These funds are not all restricted to investments in the French market. Other funds such as Index and Wellington Partners' funds are more specifically focused on a pan-European scale. The private equity firms have also demonstrated flexibility in light of the current financial situation and have strategically repositioned themselves.

Argos and Acto have taken an extra step and set up sponsorless mezzanine funds Argos Expansion and Acto Mezzanine due in part to their historic investors' demands. Argos Expansion's Olivier Bossan says: "Although sponsorless mezzanine is a popular concept in both the US and UK markets it is not as widespread as in France." For Bossan the high and stable returns mezzanine offers investors "eads us to assume that they will soon be joined by a number of competitors".

Due to "credit scarcity" Bossan believes funds such as the EUR150m Argos Expansion fund will have the opportunity to diversify their sponsorless LBOs activites in growth financing activities to include owner buyouts and expansion capital. "Since there is no point in going public in search of capital given the current financial climate, we feel that we fill the void for both small to mid manager entrepreneurs as well as investors," he says. Bossan adds: "The sponsorless mezzanine funds were created as a response to a demand in sponsorless development in France. Adaptation is of paramount importance in private equity and it reflects a degree of maturity of the French market."

Argos Expansion will meet the growing demand from European mid-market companies for structured equity allowing financing growth or transmission without the management relinquishing control or diluting their equity stake. "The advantage of these new funds is that it allows us to offer different solutions for LBOs. We can either follow the habitual majority leveraged buyouts or, more relevantly, we can now offer expansion financing through the medium of sponsorless mezzanine or even minority equity positions."Argos Expansion will be used to invest between EUR5-15m in European companies worth between EUR15-100m. Argos Soditic plans to make four to five investments a year in Europe, of which the majority will be aimed at France and to a lesser extent the Italian and Swiss market.

The new trend in sponsorless mezzanine is accentuated by Acto Mezzanine. Acto for its part completed its final closing of Acto Mezzanine at EUR187m, ahead of its target of EUR150m. Acto Investments will range between EUR5-12m primarily in the French lower mid-market. Around 70% of the fund's value will be invested in mezzanine, of which half will be sponsorless, with the remainder being provided as equity accompanying mezzanine investments. The increase in mezzanine fund activity especially in sponsorless fills a void in the market and highlights private equity firms' flexibility, as well as the health of the French mid-cap market.

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• Topics
• Mezzanine
• France