Europe, however, tends to have relatively more larger deals – about 34 per cent of European deals are between US$15-40 million against 20 per cent of US deals. Interestingly, European mezzanine deals tend to have lower defaults and higher recovery rates than their US counterparts. CEPRES data shows that the total loss rates, after default and recoveries, are 2.8 per cent for European deals and 8.1 per cent for US deals. Matthias Unser, managing director of SOPEP, says there are about 40 mezzanine funds managers in Europe but most of these have a mid-market and national, rather than global, focus. Only a few focus on sponsor-less transactions, where no bank or institution is involved in the mezzanine component of the deals.

However, demand for sponsor-less transactions is increasing, Unser says, and many banks and hedge funds who previously competed against specialist mezzanine managers have exited the market in the wake of the GFC. The developing Asian and Australian regional market was pioneered by AMP Capital Investors about 12 years ago and, as with the US and European markets, specialist managers were increasingly challenged by hedge funds and investment banks until the GFC. According to Andrew Jones, AMP Capital’s global head of private debt, there remain a small number of specialist mezzanine funds in Australia and Asia, but demand for their services is now much greater with the pull-back of senior bank debt leverage multiples and with equity unable to fill the gap.

Jones says the supply/demand imbalance is driving returns for mezzanine such that funds are providing equitylike returns for debt risk. Fees will typically consist of 4-5 per cent for arranging the deal, coupon interest of 13-17 per cent, access to equity upside through warrants and/or equity co-investment – adding up to expected IRRs of about 20 per cent. The secondary market, Jones says, currently offers even more potential with forced sellers combined with limited buyers making for potential returns of 30 per cent or more. He expects primary opportunities (initial deals) to accelerate through 2010 as significant pools of committed capital become available, leading to an expectation that the purchase multiples and earnings base will bottom. Mezzanine managers use various mechanisms for downside protection for their investors. Jonathan Robinson, a partner in Asia Mezzanine Capital Group, gives an example in which his company was involved with a Chinese company, Yingliu International Holdings, which had postponed an IPO last year.