Skip to main content
PGIM LogoPGIM Logo
    • Megatrends
    • Annual Best Ideas
    • Quarterly Market Outlooks
    • Market Events
    • Thought Leadership
    • Events & Webinars
    • ESG Investing
    • Investing in Alternatives
    • Reaching for Yield
    • Clients We Serve
    • Defined Contribution
    • Institutional Relationships
    • Advisory Solutions
    • Global Locations
    • Contact Us
    • Overview
    • Leadership
    • History
    • Inclusion & Diversity
    • Global Locations
    • Jennison Associates
    • PGIM Fixed Income
    • PGIM Private Capital
    • PGIM Real Estate
    • QMA
    • PGIM Investments
    • PGIM Global Partners
    • Contact Us
    • Subscribe
    • Request for Information
    • Careers at PGIM
    • Job Opportunities
    • All News
    • Press Releases
    • In the News
    • Facts & Figures
    • Media Contacts
PGIM Private Capital
Annual Best Ideas

‘Bridging the Gap,’ In Good Times and Bad‘BridgingtheGap,’InGoodTimesandBad

Share
  • Mail
  • LinkedIn
  • Twitter
  • Copy URL

Share

In times of economic uncertainty, when some senior lenders may be looking to lower their levels of risk, mezzanine lenders who are ready to “bridge the gap” in a company’s capital structure may see a large opportunity within the mezzanine product category.

But during a pandemic?

The grave uncertainty that was caused by the COVID-19 crisis left many companies teetering on the brink of a cash-flow crisis, including plenty in the middle-market arena. Mark Hoffmeister, a Managing Director at PGIM Capital Partners (part of PGIM Private Capital), recalls many hours of corporate counseling in the earliest days of the outbreak.

“In the very beginning, we were staying in constant contact with our portfolio companies on a daily basis, extending an olive branch and letting them know that, if they envisioned cash-flow problems, we would delay interest payments without penalty,” he said.

While the pain was acute for nearly every company at the beginning of the outbreak, some small to mid-size firms have not only stabilized their operations but have actually outperformed their business plans, under unusual circumstances. Hoffmeister tells of a portfolio company that specializes in high-end cookware, with a model based on in-home cooking demonstrations.

“Sales fell by 60% in April and we were bracing for the worst,” he said. “So, we came up with the idea of doing demonstrations online, realizing that no one would be able to taste or smell the food. Well, they made the pivot, and it took off. Their sales, on a month-over-month basis relative to last year, are well above plan. And now going forward this is another leg of the stool for this company to grow.”

Hoffmeister said that while he hasn’t seen a full return of the deal pipeline, companies that are stable and that will see operations improve when a COVID-19 vaccine is available can go to market today. Likewise, there will be many companies that stabilize further in coming months but remain behind their plans. In those cases, senior lenders may want to reduce their exposures but not exit entirely, another opportunity for mezz lenders.

The Appeal for Institutional Investors

Mezzanine financing provides institutional investors with an alternative to investments in traditional forms of senior debt or equity capital. There’s potential for higher contractual yield relative to traditional senior debt investments and greater stability relative to traditional private equity investments. As a result, many institutional investors view mezzanine funds as having an attractive risk/return profile, offering downside protection and current income.

Another appealing aspect of the mezzanine category is its ability to provide investors with significant diversification from private equity investment return characteristics; the mezzanine market, unlike PE funds, is not solely reliant on leveraged buyout transactions to deploy capital. In addition to financing change-of-control transactions, mezzanine financing can also be used for refinancing, recapitalization, growth financing, and acquisitions. These non-buyout transactions can pose less risk than an LBO as there is less pressure for rapid growth or change of business strategy in pursuit of value creation.

Additionally, mezzanine returns can match or exceed those of private equity returns in a challenging environment. The priority position of mezzanine debt in a capital structure allows for the possibility of a restructuring where the mezzanine holder receives substantial value while existing equity is meaningfully diluted.

Finally, unlike many private equity investments, mezzanine investments are usually not as dependent upon an outright sale to generate liquidity. This is especially attractive given the volatility of the M&A and IPO markets and a greater sensitivity to valuations in equity investment. Mezzanine investments can be monetized via refinancing, recapitalizations, sales, merger events, or public offerings.

PCP’s Approach

PGIM Capital Partners leverages PGIM Private Capital’s strong and proprietary middle-market investment capability through its 14-office global network and experience in managing a private capital portfolio of more than $90 billion. PGIM Capital Partners has a wide range of deal flow sourced through PGIM Private Capital’s direct prospect calling efforts, strong agent and equity fund relationships. This global network allows PGIM Capital Partners to capture inefficiencies in the middle market and generate premium returns.

To achieve strong and consistent returns, PGIM Capital Partners places emphasis on companies with strong value-added businesses and management teams with demonstrated track records and who have a meaningful economic stake in the company’s success. It seeks to avoid the cyclicality of leveraged buyout auctions through experience with a variety of transaction types and is capable of managing non-sponsored investments.

PGIM Capital Partner’s unique access to a wide range of origination sourcing channels provides increased diversification and closer relationships with key decision-makers among borrowers, enhancing investment returns and improving downside protection.

Visit PGiM Private Capital
PGIM PRIVATE CAPITAL

A leading manager of private fixed income and alternative portfolios.

Visit PGiM Private Capital

The Future in Focus
Annual Best Ideas

The Future in Focus

Jan 19, 2021

In 2021, investors must pivot from uncertainty to investment opportunity.

The Golden Age of Credit, Continued
Annual Best Ideas

The Golden Age of Credit, Continued

Near-term economic uncertainty should keep corporations conservative and focused on balance sheet repair.

Growth in a world of flux
Annual Best Ideas

Growth in a world of flux

The pandemic has fortified and, in many ways accelerated, the early stages of a paradigm shift in how companies enable growth.

Growth in a world of flux
Annual Best Ideas

Growth in a world of flux

The pandemic has fortified and, in many ways accelerated, the early stages of a paradigm shift in how companies enable growth.

Enhancing Returns: A Portable Alpha Overlay
Annual Best Ideas

Enhancing Returns: A Portable Alpha Overlay

The next 10 years may be less hospitable for investors and traditional approaches are unlikely to produce the long-term returns that asset owners need.

Next Generation of DC: Taking an Institutional Approach
Annual Best Ideas

Next Generation of DC: Taking an Institutional Approach

DC plans need to evolve towards prioritizing retirement readiness, and one way to do that is by adopting a more institutional approach to investing.

  • Insights

    • Megatrends

    • Annual Best Ideas

    • Quarterly Market Outlooks

    • Market Events

    • Thought Leadership

    • Events & Webinars

  • Investment Themes

    • ESG Investing

    • Investing in Alternatives

    • Reaching for Yield

  • Clients

    • Clients We Serve

    • Defined Contribution

    • Institutional Relationships

    • Advisory Solutions

  • About

    • Overview

    • Leadership

    • History

    • Inclusion & Diversity

    • Global Locations

    • Contact Us

    • Subscribe

    • Request for Information

  • Careers

    • Careers at PGIM

    • Job Opportunities

  • Newsroom

    • All News

    • Press Releases

    • In the News

    • Facts & Figures

    • Media Contacts

PGIM Logo
  • Terms & Conditions
  • Privacy Center
  • Accessibility Help
  • UK Regulatory Disclosures

Prudential Financial, Inc. and its related entities.

For Professional Investors only. All investments involve risk, including the possible loss of capital.

It is for informational and educational purposes only and should not be construed as investment advice or an offer or solicitation in respect of any products or services to any persons who are prohibited from receiving such information under the laws applicable to their place of citizenship, domicile or residence. PGIM, Inc., is the principal asset management business of PFI and is a registered investment advisor with the US Securities and Exchange Commission(SEC). Registration with the SEC does not imply a certain level of skill or training.  PGIM is a trading name of PGIM, Inc and its global subsidiaries.    

In the United Kingdom, information is issued by PGIM Limited with registered office: Grand Buildings, 1-3 Strand, Trafalgar Square, London, WC2N 5HR. PGIM Limited is authorised and regulated by the Financial Conduct Authority (“FCA”) of the United Kingdom (Firm Reference Number 193418). In the European Economic Area (“EEA”), information is issued by PGIM Netherlands B.V. with registered office: Gustav Mahlerlaan 1212, 1081 LA  Amsterdam, The Netherlands. PGIM Netherlands B.V. is, authorised by the Autoriteit Financiële Markten (“AFM”) in the Netherlands (Registration number 15003620) and operating on the basis of a European passport. In certain EEA countries, information is, where permitted, presented by PGIM Limited in reliance of provisions, exemptions or licenses available to PGIM Limited under temporary permission arrangements following the exit of the United Kingdom from the European Union. These materials are issued by PGIM Limited and/or PGIM Netherlands B.V. to persons who are professional clients as defined  under the rules of the FCA and/or to persons who are professional clients as defined in the relevant local implementation of Directive 2014/65/EU (MiFID II).  

In Japan, investment management services are made available by PGIM Japan, Co. Ltd., ("PGIM Japan"), a registered Financial Instruments Business Operator with the Financial Services Agency of Japan. In Hong Kong, information is provided by PGIM (Hong Kong) Limited, a regulated entity with the Securities & Futures Commission in Hong Kong to professional investors as defined in Section 1 of Part 1 of Schedule 1 (paragraph (a) to (i) of the Securities and Futures Ordinance (Cap.571). In Singapore, information is issued by PGIM (Singapore) Pte. Ltd. (“PGIM Singapore”), a Singapore investment manager that is licensed as a capital markets service license holder by the Monetary Authority of Singapore and an exempt financial adviser. These materials are issued by PGIM Singapore for the general information of “institutional investors” pursuant to Section 304 of the Securities and Futures Act, Chapter 289 of Singapore (the “SFA”) and “accredited investors” and other relevant persons in accordance with the conditions specified in Sections 305 of the SFA. In South Korea, information is issued by PGIM, Inc., which is licensed to provide discretionary investment management services directly to South Korean qualified institutional investors on a cross-border basis.    

Prudential Financial, Inc. of the United States is not affiliated in any manner with Prudential plc, incorporated in the United Kingdom or with Prudential Assurance Company, a subsidiary of M&G plc, incorporated in the United Kingdom. PGIM, the PGIM logo and Rock design are service marks of PFI and its related entities, registered in many jurisdictions worldwide.  The information on this website is not intended as investment advice and is not a recommendation about managing or investing your retirement savings. In making the information available on this website, PGIM, Inc. and its affiliates are not acting as your fiduciary.    

©2021 PFI and its related entities.