Mercer LLC has completed a white paper asserting that mezzanine debt will be an attractive investment opportunity for institutional investors in the near term, offering “near-doubling” of internal rates of return compared with past investment cycles. Mezzanine's IRR for the year ended Sept. 30, 2009, was -11.7% and for the 10-year period, 3.9%, said Bruce Lee, Mercer spokesman, citing Thomson Reuters data from the paper. Mezzanine returns over the current investment cycle should be higher than in past investment cycles because demand now outstrips supply, he said.
Mercer's thesis is that midmarket companies need loans and cannot get them from banks or collateralized loan obligations, both of which shut down following the financial crisis. Mercer's paper maintains that one factor strengthening demand for mezzanine is that private equity firms, which use mezzanine debt in buyouts, have about $500 billion in capital to spend. What's more, roughly $1 trillion in high-yield and leveraged loans are scheduled to mature between now and 2015, and the borrowers of that debt will turn to mezzanine financing as that debt comes due, the paper said, quoting Credit Suisse data. — Arleen Jacobius
