Global private markets manager Partners Group sees some of this year’s strongest opportunities in mezzanine financing, private equity secondaries and emerging markets.
Contributing to the appeal of mezzanine debt is the risk appetite of major banks globally, which are still unwilling to take on high levels of debt, according to Partners Group’s head of Australia, Martin Scott.
This unwillingness from major banks to go too high up the capital stack will likely continue for another two to three years, and investors can benefit from filling this gap, he added.
Mezzanine financing is also made more attractive because there is more equity involved in the deal compared to a couple of years ago at around 40 to 50 per cent today, greatly reducing the risk to the end investor, Scott said.
There is also an early payment penalty that covers the investment hurdle the investor is initially looking for, whereby the company taking out the loan will have to pay the rest of the loan out in full.
The conditions around mezzanine financing are made more favourable to investors because there is still a lack of available capital globally, Scott said.
Between the extra equity in the deal and tighter covenants, the investor achieves an excellent risk/return position.
Payment is usually made via an annual coupon payment, sometimes a ‘payment in kind’ payout at the end of the loan, and through equity exposure in the actual business. The term of the deals usually runs two to three years and the overall returns to the investor are around 15 to 18 per cent, Scott said.
Secondary private equity funds are also attractive because portfolios can still be purchased at a discount of between 10 and 15 per cent to net asset value, he said.
The initial public offering market is opening up globally, which has provided an opportunity for general partners to exit some of their companies, resulting in stronger distributions being returned to investors, he said.
Emerging markets private equity also still represents excellent value, he said. The median entry price multiple in the last year for purchasing portfolio companies via emerging markets was 7.3 times, compared to the more highly priced public markets which had a median price to earnings ratio of 27.6 times, he added.
