News & Analysis

driven by the PitchBook Platform
winner in a race

Featured image by Alan Thornton/Getty Images

Fund Performance

Mezzanine outpaces other private credit strategies

Mezzanine fund returns outclass other private credit strategies.

Mezzanine funds pushed through an uncertain economic environment to outperform all other private credit strategies in the first half of 2023.

Private credit overall delivered a rolling one-year IRR of 6.9% through Q2 2023, making it the second-best performer ahead of private equity, venture capital, and secondaries, according to PitchBook’s latest Global Fund Performance Report.

Real assets stood out with the top performance. The strategy’s one-year IRR came in at 9.4%.

Within the private credit, mezzanine debt funds boasted the highest returns, offering a one-year IRR of 15.5% through Q2 2023. That compares with a one-year IRR of 9% for direct lending funds and 2.3% for funds targeting distressed or special situations strategies.

Mezzanine debt, which is a hybrid of debt and equity that ranks between senior debt and equity in a borrower’s capital structure, has been gaining favor over the past two years. Such credit arrangements allow borrowers to push off principal payments until the end of the maturity period, saving them more cash when interest rates are higher.

It also offers more room for borrowers to meet their fixed-charge obligations than another common form of debt financing: the unitranche loan.

“After lenders make the loan, they want to make sure there’s plenty of cushion in an uncertain economic environment,” said Kent Brown, the head of debt advisory at Capstone Partners. “And it’s easier to have that bigger cushion when the financing is structured with traditional senior debt paired with non-amortizing subordinated debt, aka mezzanine.”

The revival in fundraising momentum for mezzanine funds has corroborated the growing popularity of this genre of loan.

Mezzanine funds collected $27.1 billion over the first three quarters of 2023, representing roughly 20.6% of the overall capital that flowed into private credit strategies, according to PitchBook’s latest Global Private Market Fundraising Report. On average, mezzanine debt fundraising has constituted just 12.3% of totals in the last five years.

Featured image by Alan Thornton/Getty Images

Join the more than 1.5 million industry professionals who get our daily newsletter!