The current refinancing gap for middle-market companies, created by reduced bank lending, has opened up some attractive mezzanine debt investment opportunities, according to a Mercer report.
As banks have reduced their lending levels following the global financial crisis, the Mercer paper indicated mezzanine debt funds have emerged as one of the main sources 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 prior market cycles.
Mercer said the investment case is also supported through analysis of the demand side, with around US$500 billion of capital still to be deployed for future private equity investing, as well as the refinancing of approximately US$1 trillion in high yield and leveraged loans maturing between now and 2015.
Mercer's bond boutique global head Paul Cavalier said mezzanine debt was currently a strategy that investors should be considering as part of their future alternative or opportunistic fixed-income portfolios.
"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," he said.
"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."
