Where did all the small mezz go?

by John Dalton, IDI Managing Partner

Five years ago, Industrial Device Investments (IDI) pursued an acquisition of a $1.5 million EBITDA equipment manufacturer. With more than a dozen or so interested parties, we ended up with four SBIC subordinated debt funds at or near proposal in the deal. We sought $2.25 million in subordinated debt, and modeled a $250,000 equity co-investment. We collaborated with the best partner, and closed the deal.

This year, IDI is pursuing acquisition of a $1.5 million EBITDA equipment manufacturer, where we were seeking $2 million of subordinated debt and modeled a $200,000 equity co-investment…nearly the same size company, earnings and debt request…and we found no interest in the financial markets.

Both companies had strong opportunity, but neither deal was perfect. With lower middle market industrial companies as our target ($1 – 3 million EBITDA for control investments), our family office enjoys much lower purchase price multiples than larger deals, and mitigates our risk with our operating experience.

So, where did all the small mezz go? Well, for the six or so funds that we have worked with in the past, most went to larger funds and larger checks… and much higher purchase multiples for their equity partners and the funds co-investment. Alas, with lower risk…at least statistically.

We think patient debt capital is now going to come from family offices that can tolerate a five year balloon, low or no collateral but with a “sub debt” cash coupon of 12-14%.

Are you or your fund, or any of your financial friends, interested in this structure? Because we have an ongoing need for a great partner, in a market of subordinated debt that seems to have fled our target area. Thoughts?