Cover case study

Loss rates in the European mezzanine market

Published by : Cover

In an environment characterized by uncertainty, weak GDP growth and record-low interest rates, investors are in search of yield. European mezzanine investments, as an asset class, offer investors attractive floating base rates that address their need for yield, while at the same time protecting them from an inflationary interest rate environment.


This paper investigates the loss rates of European mezzanine investments as well as the year-over-year volatility of those loss rates. We analyzed transaction data from a comprehensive set of 439 mezzanine investments that were fully realized on or prior to 31 December 2012. All 439 investments were made between 1989 and 2009, a 21-year time period that covered several economic and market cycles (referred to herein as the "Observation Period").


The analysis yielded several conclusions: (i) loss rates for European mezzanine investments during the Observation Period were relatively low overall at an annualized rate of 1.8%, (ii) however, a meaningful year-over-year volatility did exist, (iii) by building portfolios that spannedmultiple
investment years, the volatility of both loss rates and returns may have been meaningfully reduced with minimal impact to returns, and (iv) the returns, in aggregate, were never below 1.0x for any vintage year, with a total pooled investment multiple of 1.59x of invested capital from the 439 European mezzanine transactions.


 

Published:26 September 2013

Business Area: Europe

Type: Portable Document Format (.pdf)

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