Similar to mezzanine capital popularity in the US, private equity investors in Europe are increasingly turning to mezzanine financing as a potential source of capital to finance various financial deals including acquisitions and recapitalizations. However, European mezzanine instruments are often substantially different from those in the US and more often than not, they tend to resemble a second lien bank facility, with a form derived from the senior secured facility in the relevant transaction.
Deployment of Mezzanine Capital in Europe
In Europe, market conditions determine the use of mezzanine finance to a greater or lesser extent. Its most important use is as an alternative to high-yield bonds in the capital structure of sponsor-backed companies. However, in Europe, mezzanine transactions in particular involve complex intercreditor arrangements, often requiring consideration of legal and other issues in multiple jurisdictions. As is common with other types of European debt financings, investors must deal with limitations on the enforceability of guarantee and security claims which apply in many European jurisdictions when structuring mezzanine debt investments. Furthermore, the European mezzanine opportunity remains limited by its legal framework as some European governments have imposed limitations on the interest tax deductibility thereby reducing the tax benefits of mezzanine investing.
Mezzanine Debt Market in Europe
The mezzanine debt market has seen very little variation during the past three years, and financial gurus are predicting stable market volumes for the near future. Studies published have shown that in the European market, mezzanine deals below €50m are the most abundant. Also, large-cap funds absorbed a high percentage of the deals available across European markets (78% vs. 62% on average for respectively the large-cap segment and the small and mid-cap space). On further evaluation it was found that unlike the large-cap market which is efficient, the small and mid-cap market benefited from little competition and attractive risk-adjusted return. Large-cap funds were faced with lower investment possibilities, and are, therefore, were more limited when selecting investments.
The European mezzanine debt market, over the years has also grown to be a credible alternative source of debt funding, used more and more by the European small and midsized companies. Research into mezzanine deals conducted over the last three years has shown that mezzanine debt is used to finance c. 65% of buy-outs and c. 80% of organic growth for small and mid-cap companies, versus c. 35% and c. 20% respectively for large-caps.
When it comes to countries within Europe that are increasingly using mezzanine capital, France tops the list in both the small and mid-cap segments. This was followed closely by UK, DACH, and Nordic countries. The least users of mezzanine finance were Benelux, Southern Europe and CEE.
Attract Capital- your gateway to mezzanine financing in Europe.
Attract Capital is an industry pioneer in mezzanine loan financing with 20+ years of experience in helping private companies access mezzanine funding directly from mezzanine lenders. With a lender platform of over 100 mezzanine debt-financing providers and a well-developed workflow process, Attract Capital can provide quick sourcing solutions for your mezzanine loan funding needs.
Contact us now to set up a free consultation.