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Sometimes mezz lenders do smaller deals and take priority/senior positions with mezz-like returns. Maybe they hit a home run on some equity sweeteners too that they packed into a small deal that blew up (in a good way)?
That could be an explanation, however the number of deals in this average irr makes me skeptical. On a side note, what ways could a firm like this exit warrant positions besides a change of control like an LBO?
When you say “firm”, do you mean across all its funds since inception? I would guess you mean only one fund that is probably freshly raised (last couple months) and found one or two quick secondary deals. To know whether a 25% unlevered [probably gross] irr is truly impressive, we would have to know how long the track record is and the MOIC.
Yes, over multiple funds and correct, irr is gross. I think there are secondaries. Would secondaries increase irr because you are getting in at a discount?
I mean you can call it 1L but in the LMM, there typically isn't room for more than one lender to begin with so 1L can quickly become mezz like risk. I'm assuming this is more opportunistic credit with warrants attached.
You sure that 25% is real though? That's high for any credit strategy. Have these positions been held a few years, or did they just underwrite a bunch of deals, mark up the warrants, and call it a 25% IRR?
Does it become similar to mezz risk in LMM because of lack of asset coverage? How would marking up warrants work? (Basing value on current "market value" of the portco?)
It's similar risk because like you hinted at, it's mostly based on cash flow/growth as opposed to pure hard assets.
Not sure how small these companies are but for example, if leveraging a company with $1.5MM EBITDA is completely feasible for them to 10x in 3 - 5 years?
But I think a post above mentioned this was @ each investment instead of being driven by one deal going bananas...
Valuation methodologies depend on firm a bit. If it's a good firm, they won't mark up their warrants quickly and will deduct the initial estimated value from the entry basis of the debt position, accruing that initial estimated value over the term of the debt position.
I really have no idea what this company is doing though, so I could be dead wrong. I'm just fairly skeptical of any debt IRR > 20%.
Hey, DM me. I think I know the firm you’re talking about and know why they’re able to underwrite senior loans to a 1.5x+ MOIC and 25%+ IRR.
1.5 moic with 25 unlevered? are these sponsors repaying early? why are they able to exit within 2 yrs?
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