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Mercer's investment consulting business has released its paper on Mezzanine debt. Available now!

Paul Cavalier, Bond Boutique Global Business & Investment Leader, at Mercer said: "As part of a series of opportunities that we have identified for our clients since the beginning of 2009 we have raised the private debt universe as a key strategy for the medium term.

As with most investments there are risks attached and active portfolio management and credit analysis skills will be required to ensure default risk is minimised. To address this, when investing we believe careful investment manager selection should be undertaken and we have applied our global resources in identifying high quality firms.

Mezzanine debt is debt that is junior to traditional bank financing but senior to equity financing in a capital structure. In the corporate market, mezzanine debt is most prominent among middle market companies that are often too small to access traditional high yield corporate bond markets. Mezzanine debt is also part of the debt structure of private equity transactions.

The supply side of mezzanine debt has been impacted by the recent global financial crisis with banks (in particular) ability to lend having declined significantly. Capital structures also tend to have greater equity allocations now, providing an additional cushion for debt investors. These changes combined with better terms, high coupons and potential equity participation make for an interesting opportunity for patient investors with risk capital.

In its paper Mezzanine debt An attractive lending opportunity , the firm notes that as banks have reduced their lending levels following the global financial crisis, mezzanine debt funds have emerged as the main source of financing for middle-market companies. The current high demand for this type of financing, both from middle market companies and the private equity sector, has resulted in a near-doubling of return rates** for investors compared to five plus years ago.

Mercer believes the investment case is also supported through analysis of the demand side, with approximately US$500billion of capital still to be deployed for future private equity investing (and thus potentially requiring some mezzanine support) and the refinancing of approximately US$1trillion in high yield and leveraged loans maturing between now and 2015.

For online purchases this report is available for immediate download in PDF format.