Q&A: Reaching the mezzanine level

Why did you decide to spin out of Eqvitec?

Eqvitec set up its first mezzanine fund with EUR 46m in committed capital in 2000 to primarily support the firm's technology-focused venture funds. Many of the investments were jointly made, and mostly in Finland. This first fund did very well and is now in profit-sharing.

But when the IT bubble burst, we gradually started to shift our focus towards more ordinary buyout mezzanine. The second fund, which was closed on EUR 53m in 2005, has now been fully invested. From this fund, only one joint investment was made with Eqvitec's equity funds and the mezzanine product was marketed in all Nordic countries as a buyout mezzanine fund, with less of a focus on technology.

Since the synergies had been diminishing over time, it made sense to separate the two businesses after the third fund was raised. This way, both parties can now focus exclusively on their core businesses.

You closed this latest fund in March 2009 on EUR 103m, double the size of its 2005 predecessor. The market for mezzanine was fairly dry in 2009, do you worry about dealflow going forward?

Actually, despite hardly any deals being completed in 2009, our dealflow was brisk. It was the execution that was the main problem; very few deals reached completion. In the last quarter of 2009, however, the market started to turn and the quality of deals improved.

Although banks are back in business again, they remain cautious. Therefore, there is a great opportunity for mezzanine to fill this financing gap. For example, we participated in Altor's acquisition of one of the clusters of the Swedish pharmacies when it was privatised in November last year and also invested in AAC Capital Partners' Envirotainer deal. In fact, the third fund is well up to speed in terms of activity.

Have you noticed any differences between the Nordic countries in terms of deal activity?

Yes, the majority of our pipeline is currently in Sweden. We are expecting the Danish and Norwegian markets to follow suit, but Finland seems to have a slow start. The uptick in activity is mainly down to signs of economic recovery, namely improved visibility, banks opening up for business and pressure for private equity firms to make investments and offload portfolio companies. Additionally, the quality of deals we see are better, so we are very optimistic with respect to future dealflow in all the Nordic countries.

Over the past year mezzanine has been said to have lost out in restructurings, what is your view on this?

These cases have usually involved a number of senior and junior lenders in large syndicated deals. In the Nordic region, average transactions are smaller in size and thus only include one or two banks, one mezzanine provider and one equity sponsor. We mostly participate in this type of club deal, which means we are higher up the capital structure and don't have to fight a big consortium of lenders with a different agenda. So in the small- to mid-cap Nordic market, risk is reduced, while maintaining the upside of mezzanine's cash interest components and warrants.

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• Topics
• Financing
• Mezzanine
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• Mezzanine