An attractive and opportunity rich environment

In 2010, we proposed that clients consider an allocation to mezzanine debt. The rationale supporting the mezzanine risk/reward profile was driven by conditions favoring lenders. The critical factor in those changing conditions was a diminishing supply of debt capital, as bank balance sheets contracted during the global credit/liquidity crisis of 2007–2008 and the collateralized loan obligation (CLO) market retrenched dramatically.

Furthermore, a substantial wave of high yield and leveraged loan maturities loomed on the near horizon and an estimated $500 billion of committed but un-invested private equity capital pointed to robust demand for credit over the foreseeable future. With debt capital scarce and appearing likely to remain so for some time, lenders were able to demand attractive terms from borrowers.

Since then, the supply of capital has increased somewhat and high yield bond markets – a partial substitute for some larger mezzanine debt issues – have reopened. Reviewing the situation from a macro level, we believe the rationale supporting an allocation to private debt, including mezzanine debt, infrastructure debt and real estate debt, remains intact. Although competition is increasing and high yield bond markets have reopened, we believe attractive performance is still attainable, either via the illiquidity premium that private lenders are able to extract by sourcing ideas from small to mid-market companies and/or by providing dynamic solutions to borrowers of small to large sizes.

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