Mezzanine offers are predicted to surge this yr, as excessive rates of interest and tighter credit score circumstances current alternatives for lenders.

Mezzanine debt bridges the hole between senior debt and fairness financing and is without doubt one of the higher-risk types of debt, producing returns of as much as 20 per cent.

It had been by means of a decade-long interval of decline, going from 68 per cent of personal debt offers in 2009 to 11 per cent in 2022, based on Preqin knowledge.

Business stakeholders attributed this decline to non-public credit score lenders’ give attention to different forms of financing akin to unitranche offers, which mix senior and junior debt right into a single mortgage.

Learn extra: Fintex Capital gives extra mezzanine finance to ThinCats

Nevertheless, in 2023, mezzanine’s share of the variety of non-public debt offers rose to 24 per cent. Larger rates of interest and harder lending circumstances – mixed with regional financial institution turmoil within the US – have led to a restoration in demand for mezzanine financing.

There was a 55 per cent year-on-year enhance in mezzanine fundraising in 2023 to $40.6bn (£32bn), as buyers look to realize publicity to increased return non-public debt belongings.

Damien Guichard, head of European non-public credit score at Allianz International Traders, stated he expects to see extra mezzanine debt transactions this yr.

“We’re seeing some rebalancing now away from unitranche transactions in direction of conventional senior debt,” he stated.

“Unitranche loans have been the successful format over the previous decade. They’re not going to go away however we’re seeing a transfer in direction of extra conservative, conventional senior debt with decrease rates of interest.

“There’ll most likely be extra mezzanine debt transactions this yr. It goes again to what I stated about extra senior debt buildings coming into the market, they usually usually include a mezzanine layer.”

David Bouchoucha, head of personal debt and actual belongings at BNP Paribas Asset Administration, additionally stated he sees alternatives in junior debt this yr, which incorporates mezzanine financing.

“A junior tranche may be very attention-grabbing and we try to persuade extra buyers to do that,” he stated.

“The incremental threat in comparison with pure senior debt stays fairly marginal.”

Learn extra: Personal debt market to develop to $2.8trn as variety of funds hits document excessive

Mezzanine debt is actually making a mark on the non-public debt panorama once more.

Three of the highest 5 largest non-public debt funds to shut final yr have been mezzanine, based on Preqin knowledge.

HPS Funding Companions’ HPS Strategic Funding Companions V closed in April 2023 having raised $17bn.

That was adopted by Goldman Sachs’ GS Mezzanine Companions VIII, which raised $11.7bn in January that yr.

The fourth largest fund was Crescent Capital Group’s Crescent Credit score Options VIII, which raised $8bn in February 2023.

Nevertheless, macroeconomic challenges are a possible headwind for mezzanine debt. Preqin’s newest investor survey in November 2023 discovered that 27 per cent of restricted companions stated mezzanine debt provides one of the best alternatives for funding over the subsequent 12 months. This was down from 38 per cent in June 2022.

Learn extra: International non-public debt fundraising in 2023 barely down from 2022

“This can be all the way down to buyers weighing the advantage of increased spreads with mezzanine debt in opposition to the chance of recession, and the way which may impression extra junior debt positions,” Preqin stated. “If we see a rise in defaults within the broader financial system, buyers may shift their preferences to methods that may profit from this, akin to distressed.

“It appears more likely to us that the outlook for mezzanine debt can be entwined with buyers’ macroeconomic outlook. Though distressed debt and mezzanine debt each entail increased ex-ante threat than direct lending, they permit buyers to specific completely different views on how the longer term will pan out.”