By Sree Vidya Bhaktavatsalam and Jason Kelly
Dec. 13 (Bloomberg) -- Goldman Sachs Group Inc., TCW Group Inc. and New York Life Capital Partners are raising more than $30 billion to increase their investments in leveraged buyouts.
At least 32 firms are starting mezzanine debt funds as investors shun bonds and loans used to finance LBOs out of concern that the collapse of prices for subprime-mortgage securities will spread. Mezzanine funds make loans to companies at higher rates than banks and buy their preferred stock. They earn returns from interest payments and the eventual sale of the equity interest.
``Today, virtually no one is willing to finance LBOs and it's created an opportunity for mezzanine providers,'' said John Morris, managing director at Boston-based HarbourVest Partners LLC, which oversees $24 billion of private-equity investments for institutions.
Goldman, the world's most profitable securities firm, is gathering $20 billion for the biggest mezzanine fund, said two people with knowledge of the matter. TCW, which manages more than $150 billion, is raising $4.5 billion to split between two funds, said the people, who declined to be identified because the companies haven't disclosed their plans.
Officials at New York-based Goldman and TCW in Los Angeles declined to comment.
New York Life Capital, the investment unit of New York Life Insurance Co., raised $800 million last month for its second mezzanine fund, $200 million more than originally sought. The fund will provide financing for acquisitions as large as $4 billion, said Thomas Haubenstricker, a senior managing principal at the firm.
Funding Backlog
``We have the opportunity in this market to work on deals that are larger than what would typically come to our market,'' Haubenstricker said.
With financing readily available, LBO firms announced a record $582.6 billion of deals in the first half of 2007, data compiled by Bloomberg show. That fell to $171 billion in the past five months as lenders were left with $370 billion of debt that they couldn't sell to investors, according to a Sept. 24 note by analysts at Bank of America Corp. in New York.
``When the big commercial banks move, they go far in both directions,'' said Rick Rickertsen, managing partner of Washington-based private-equity firm Pine Creek Partners.
While the banks have reduced some of the backlog, they are still sitting on $230 billion of debt, according to a Dec. 4 report by JPMorgan Chase & Co. analysts in New York.
Taking More Risk
Private-equity firms use funds raised from investors to finance as much as 30 percent of their acquisitions. They borrow the rest against the assets of the companies they buy, using the business's cash flow to pay down the debt.
As much as 50 percent of the funding comes from senior debt, which banks package and sell to investors. The remainder is financed using high-yield loans and mezzanine debt, which is unsecured, high-yield borrowing that ranks last for repayment in the event of default.
``The ability to access the high-yield markets, which is a very important component of all buyouts, has if not disappeared, become very tough,'' said Scott Sperling, co-president of buyout firm Thomas H. Lee Partners LP in Boston, said today in a Bloomberg TV interview. ``That makes mezzanine financing a more attractive alternative and sometimes the only alternative to help finance buyouts.''
Mezzanine funds also acquire equity in some buyouts to generate higher returns for investors. They take the added risk to earn annual returns of as much as 20 percent before fees, said Patrick Campbell, a principal at New York-based Benedetto Gartland & Co., which raises money for mezzanine-fund managers.
By contrast, junk bonds, often sold as part of LBOs, returned an average 6.97 percent from 1997 to 2006, according to indexes compiled by Merrill Lynch & Co.
``Investors have a much greater appetite for mezzanine funds because the risk-return rewards are so much better,'' Campbell said.
The following is a list of the 10 largest mezzanine funds being
raised:
Fund Target Manager
GS Mezzanine Partners V $20B Goldman Sachs
TCW/Crescent Mezzanine Fund V $2.5B Trust Co. of the
West
TCW Energy Fund XIV $2B Trust Co. of the
West
N.Y. Life Mezz. Partners II $800M* N.Y. Life Capital
Capzanine II $368M** Capzanine
CapitalSouth Partners Fund II $300M CapitalSouth
Partners
Darby Asia Mezzanine Fund II $300M Darby Overseas Ltd.
Darby Latin Am. Mezz. Fund II $300M Darby Overseas Ltd.
MidWest Mezzanine Fund IV $200M Midwest Mezzanine
BNY Mezzanine Partners $200M Bank of N.Y./Mellon
*Closed
**250 million euros
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