Mezz is back

One man's loss is another man's gain and nowhere is this clearer than in the subordinated debt market right now. Anecdotal evidence suggests the layer is set for its headiest days yet, with mezz now accounting for up to 2x Ebitda on average in a deal, up from 1.0-1.5x six months ago. And it's not just the quantity - quality is also on the up, with pricing more favourable for traditional mezz lenders and warrants back in a big way.

Mezzanine specialist ICG just announced record gains for the second year in a row. In fact the LSE-listed business, which tops unquote's league table of mezz investors since 2003, has been bulking up as others are scaling back, with the most recent recruit a former Goldman Sachs professional.

In fact much of ICG's growth is coming from outside the UK, traditionally a very strong market for mezz. Eight years ago more than 50% of ICG's business was in the UK; three years ago that figure had dropped to a third and today it stands at less than a fifth (17%).

Other European markets have attracted the lion's share of diverted funding: last year the majority of mega-deals (EV > EUR1bn) containing mezz were outside the UK, with France and Germany featuring heavily in the line up: Yachtbau (Germany), Elis (France), Fraikin (France), HC Starck (Germany), Keolis (France), Molnlycke (Sweden), ProSiebenSat1 (Germany), Securitas Direct (Sweden), Selecta (Switzerland), Thule (Sweden), Zodiac Marine (France).

And besides Western Europe, emerging markets are blipping more heavily these days: Asia now makes up an impressive 5% of ICG's activities and the firm provided the largest-ever mezz strip in Central and Eastern Europe (CEE) when it backed the Mid Europa Partners-backed tertiary buyout of Aster City Cable in Poland. Its interest in CEE won't be limited to the one deal: ICG hired Aleksander Ferenc to head up its origination for the region. Ferenc cut his teeth at Barings' CEE private equity team.

Indeed the new markets are alluring many a wise investor. UK-based mezz player Indigo partnered up with a group of CEE investors to form what is now Syntaxis Capital. Emerging markets specialist Darby raised EUR248m in capital commitments earlier this year for the region. Touted at the time as CEE's largest dedicated mezz fund, it was overtaken by incumbent Mezzanine Management Central Europe which just last month raised EUR261m.

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