Disillusioned with PE - switch to Mezz?

I work at a top-tier MM PE firm and honestly, I've become a little disillusioned with the amount of shit I have to deal with. Don't get me wrong, my hours are not considered terrible (probably 60-70/week, no weekends), but the entire execution of the deal process is nauseating and repetitive. Since we're swinging for the fences (>3x MOM for new platforms from growth juice/buy-and-build - not looking for 2x MOM on stable cash flow), we typically do a shitload of work and try to uncover every stone. Getting PwC/KPMG/E&Y to build up databases and diligence the shit out of companies always result in finding things that we don't like, which causes us to drop purchase price at the last minute and haggle over the last $5-10 million. The amount of diligence we do causes us to lose sight of the original investment thesis.

Has anyone else felt this way about PE in the MM?

My main question is whether anyone has experience or know of people switching from PE to a direct placement mezzanine fund (Ares, GSO, BlackRock/Kelso, Carlyle, MSCP, AIC, etc.)? It seems to me since you are more concerned with preservation of capital and putting small bite size $ to work, the entire deal/diligence process should be more efficient and less prone to the myopia we run into in private equity. Also, as an anecdote, our strategy in PE is to spend the least amount of time possible educating the lenders in order to get commitment papers. Given that mezz guys only get a limited amount of exposure to the equity sponsor and receive diligence responses piecemeal (and slowly, as sponsors need to get their own diligence done before they spend time with lenders), theoretically the mezz diligence process is more high level and results in less brain damage. Can anyone comment on whether this statement makes sense?

Would love to hear people's thoughts on mezz diligence process, lifestyle and compensation relative to PE. Also, is it tough to make the switch (my hunch is no, but I have not talked to any headhunters about it).

Comments (7)

 
Jun 4, 2011 - 3:02pm

i think you hit it dead on the nail... mezz investors are looking to preserve capital but juice returns with minimal equity coinvest. Much of the diligence is performed by the Sponsor and the Sponsor will give the mezz investor everything they need. Mezz guys will help build diligence lists, but won't actually go out and perform as much of the diligence that PE guys will since the PE guys want the mezz players' capital.

Hrs are good..

 
Jun 5, 2011 - 6:07pm

If you dislike finding and analyzing negative things about the deals you're looking at, I don't know that you would enjoy debt investing that much more. The investment thesis for a debt deal is basically built upon asking the question "what can go wrong," and you'll continue to debate every single detail. In my opinion, the real bummer is that you don't really care about "what can go right." Yeah the equity co-invest can bump up a return, but you really don't get any upside if things go really well because you'll be refinanced out of the business.

Something else to consider is that you'll review a LOT more deals because you're investing smaller chunks of money and you will lose more deals. In a mezz deal, you have to win the financing, and then the sponsor has to win the deal. So if you don't enjoy looking at a shitload of deals, I'm not sure you'll enjoy mezz investing more than PE.

And yes the diligence process is lighter on the debt side since you're not coordinating it, but at least at our firm we still do quite a bit of legwork.

 
Jun 6, 2011 - 8:27am

threatlevelmidnight:
Something else to consider is that you'll review a LOT more deals because you're investing smaller chunks of money and you will lose more deals. In a mezz deal, you have to win the financing, and then the sponsor has to win the deal. So if you don't enjoy looking at a shitload of deals, I'm not sure you'll enjoy mezz investing more than PE.

I second that.

 
Jun 5, 2011 - 6:10pm

Depending on the mezz style, it's true that a lot of due diligence can come to the table from the sponsor. However a lot of mezz funds have branched out into other forms of lending/debt investing that don't always come pre-packaged with due diligence. At least a few of the places you mentioned have capacity across the debt spectrum-for example Ares has a big exposure to lower MM/unitranche lending esp with their Allied legacy business, and BDCs like Kelso and Ares Capital often are the primary "smart money" in their deals. The fund I work at does a wide spectrum of debt investing including distressed, structured, and mezz, and our level of PE-style due diligence on private debt varies a lot depending on the deal.

In my experience mezz comp is lower than sponsor side, but many of the places you named are affiliated with sponsors and may have fairly consistent pay across junior levels. Presumably the value of any carry/fund participation is lower but more stable on the mezz side.

Most of the people at the fund I work for are career-long debt people but I see ex-sponsor people at mezz shops fairly regularly.

There have been many great comebacks throughout history. Jesus was dead but then came back as an all-powerful God-Zombie.
 
Jun 5, 2011 - 10:17pm

Not trying to hijack the thread, but what do people think about making the opposite switch, from mezz to direct pe? I assume both jobs develop similar skils and thus one would be able to cross-over either way - i.e., mezz is much more similar to PE than IB is to PE

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