A February 2018 article in Pensions & Investments, "Mezzanine Managers Losing Places at Table," discussed how mezzanine funds have been "pushed out of deals." In middle market transactions, the traditional acquisition financing structure included senior debt, mezzanine debt, and equity. Today, many acquirers are eliminating mezzanine debt entirely, or replacing it with a second lien term loan. Another alternative is unitranche loans, which combine senior debt and subordinated debt into a single loan with a blended rate.
According to Sutton Place Strategies (SPS), the "decline in mezzanine transactions continued in Q2 of 2018. For the 12-month period ending June 2018, activity was down 41.6% from 560 to 327." SPS has stated that approximately 8% of new private equity platform investments in Q2 2018 included mezzanine financing, compared with 18% in Q4 2016. This is further evidence that private equity preferences have shifted toward unitranche and second lien.
Mezzanine funds have responded, especially for private equity sponsored transactions, by lowering interest rates, and reducing or eliminating equity kickers (mezzanine warrants). They have also pursued an "if you can't beat 'em, join 'em" strategy by broadening their offerings. A recent example is Avante Mezzanine Partners, which changed its name to Avante Capital Partners, and expanded its offerings to include unitranche, second lien, mezzanine, and equity co-investments.
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