Wizards of Finance Becoming Mainstream-The Role of Mezzanine and Hedge Funds in Todays Tough Deal Environment

Following are my notes from last week’s AM&AA conference on the panel, "Are the Wizards of Finance Becoming Mainstream? The Role of Mezzanine and Hedge Funds in Today’s Tough Deal Environment".

Todd Sternier, Caltius Capital

Caltius plan in 2009: provide market one-stop capability: senior and mezzanine. $500m AUM.

Market less dilutive liquidity alternatives. Dividend/ equity cash out. MBO/partner buyout.

Recap existing debt facilities coming due.

Target select sponsors.

Investor base mostly insurance cos.

We can do small coinvestments. Usually not control situation.

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We recently looked at a company that licensed music to educational facilities. 50-50 ownership between brothers. They looked at ESOP to finance the deal.

We also like education. We dislike black box businesses, cyclical businesses.

Brad Tribesch, Partner, Central Valley Fund, Davis, CA.

Offices in Fresno-partner with UC Davis & Fresno State. $50m AUM. Investors include Wells Fargo, CalPERS.

We require >3 years of operating history. Revenues >$5m. EBITDA>$1m. California centric operations. Strong management. Now raising his second fund, about $100m. We’re now restricted to cos. based in CA.

CFO.com forecasted mezz could be 30% of capital structure for some companies in 2010.

Cash flow lending in our area has dried up, so you’re reliant on ABL. There’s no ibanking capability in CA central valley.

When we first started, commercial banks were competing with us for deals.

We like online education, during a downturn (Corinthian). We don’t understand construction/building materials.

Jan Hanssen, Pem Group, based in Irvine, CA.
$4b. European basis. Historic focus on China, insurance market. Last year, we decided to focus on US finance business. I was hired for that.

We started off doing sub debt, but have gotten into senior as well. We’re taking less risk with the pricing. Doing lower EBITDA multiple. Taking less risk. We did a deal in the fall for $30m.

We act like a hedge fund without the redemption pressure. Our strategy in the crunch is to charge the same but take less risk.

We’re doing more asset-based/turnaround deals.

Maximum leverage levels possible:
Senior debt was 4x EBITDA a few years ago, now 2x EBITDA.

All-indebt from 6x EBITDA to 3x.

Most of our money from Taiwan and China.

I have never seen an ESOP really work. Tribesch also prefers MBOs over ESOPs.

I price at whatever I can get away with. My senior is more expensive than senior.

I do an asset-based loan and call it senior, and do a cash flow loan and call it sub.

We will do the revolver. I want to do it to have control, see the cash come thru.

Deal flow up 150%. Mezz for next 3 yrs will be increasingly part of capital structure.

These times are the revenge of the sub-debt players. The pricing we could get 10 yrs ago were 25-30% IRRs. We got 12% rate, 2% PIC, 0.5% to close. Now that’s what a mezz debt gets

We havent yet seen the snowball effect on the equity funds. The reason is that you can readily sell your investment in a public co. It’s harder to sell your investment in a private co. A lot of hedgies will be selling private investments in 09.

A certain major PE fund bought an ag processor 2 yrs ago in our area. Revenues have dropped 1/3, and they’re looking at MBO.

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