Vantage Mezzanine

Introduction

Vantage Mezzanine is the largest independent provider of mezzanine risk capital to medium-sized South African businesses seeking to either expand their operations or change the structure of their ownership. Vantage Mezzanine’s independence allows it to structure the best possible financial solutions for its corporate clients spanning a broad range of debt and equity instruments.

In structuring its deals, Vantage Mezzanine can be more flexible than many other capital providers in the South African marketplace. Unlike traditional senior lending, it is not focused primarily on the assets and on the available security underpinning a transaction. An in-depth understanding of cash flows drives its decision-making. This allows it to provide significantly more debt to a given transaction than traditional lending criteria would allow.

Unlike most funds that have a strong equity focus, Vantage Mezzanine seeks to earn most of its return through debt instruments. This makes Vantage Mezzanine a friendly place for management teams seeking to minimise the equity dilution associated with their capital raising activities. Similarly, its debt focus makes it a friendly place for black empowerment consortiums seeking to:

  • maximize their share of the equity in a given transaction, and
  • shorten the time it takes for them to enjoy the full economic benefits of their assets.

Most importantly, Vantage Mezzanine is able to invest significant capital in individual transactions, being backed by leading South African pension funds and asset managers as well as highly-reputed foreign development finance institutions.

These investors and Vantage Capital Group collectively provided Fund I with total capital commitments of R1,003 million ($150 million), allowing Vantage Mezzanine to build a diverse portfolio of mezzanine assets across a variety of sectors (chemicals, forestry, catering, media and steel recycling). In 2007/2008, the Fund was fully invested in five transactions in South Africa, namely Safripol, York Timbers, Tsebo, Primedia and Masevumeni. By March 2015, Vantage had successfully exited four of these investments.

In March 2012, Vantage Mezzanine closed Mezzanine Fund II, which had a pan-African investment focus (with a 35% allocation to opportunities outside South Africa) and could make investments up to R200 million ($20 million) in a single transaction. R1.9 billion ($240 million) of commitments were secured from fourteen pension funds, three charitable endowments, two development finance institutions and a family office. In August 2015, the Fund was fully invested in nine transactions in South Africa (TrenStar, Efekto, Kgoro, Timrite, Pretoria Towers, Austell, Dynamic Bedding, Afrisam and Servest) and four transactions outside of South Africa (CA Sales in Botswana; Genser and Surfline in Ghana; and Simba Properties in Uganda). By end-2015, Vantage had successfully exited three of these investments.

Vantage Mezzanine is in the process of investing its 3rd Mezzanine Fund. Vantage Mezzanine Fund III closed with final commitments of circa R3.9 billion ($280 million) in March 2017 and has a Pan African mandate. Vantage is well-positioned as Africa’s leading mezzanine financier, capitalising on its strong position in the South African mezzanine market and building a portfolio of income generating mezzanine assets in South Africa and in the rest of Africa.

The Opportunity

Until early 2000, funding structures in South Africa comprised of only two components: senior debt provided by the banks, and equity that was provided by private equity funds and other institutions such as the Industrial Development Corporation.

The government’s success in introducing a measure of macroeconomic stability and predictability has led to the emergence of a huge potential market for “mezzanine” products, which rank behind secured bank debt but ahead of equity and which are called hybrid products as they usually combine both debt and equity features. With senior debt sourced at rates of 10-15% and equity funds targeting returns of 25-35%, the space for funders seeking to earn returns between 15-25% has ballooned.

This is the gap in the market that Vantage Mezzanine is seeking to profit from by providing highly tailored financial solutions, which combine aspects of both equity and debt in new, innovative ways.  The benefits of this innovation will be shared with its clients: primarily entrepreneurial management teams which will be able to achieve their objectives with less equity dilution thereby spurring risk-taking and investment, and empowerment groups that will shorten the time it takes for them to acquire the full benefits of unencumbered real economic ownership of their assets.

What value can Vantage Mezzanine provide to a management team?

Vantage Mezzanine can minimise the impact of a replacement capital or an expansion capital transaction on its equity shareholding and on the overall ownership structure of the business.

With its debt-based focus, a mezzanine based solution can:

  • Avoid the significant equity dilution which accompanies traditional private equity deal structures;
  • Avoid potentially disruptive shareholder disputes associated with diverging exit agendas;
  • Help resolve such disputes by facilitating the exit of certain shareholders whilst maximising value for the remaining investors;
  • Provide the funding required for the buy-out of a business currently run by a management team or assist managers in buying into a new business;
  • Help managers expand their existing business by providing expansion capital, which can also be used to fund the purchase of businesses complementing the existing operations and providing critical mass; and
  • Apply the entrepreneurial, business development and private equity skills sets of the Vantage Mezzanine team to assist management in building long-term sustainable value for all the stakeholders.

What value can Vantage Mezzanine provide to a BEE partner?

BEE funding can be structured along flexible, cost-efficient lines which shorten the time BEE partners need to wait before they enjoy the unencumbered economic benefit of their ownership. With its small, entrepreneurial team and its straight-forward decision-making processes, Vantage Mezzanine can move quickly to provide a BEE investor group with funding certainty. Speed is often a significant competitive advantage in a highly contested marketplace.

What value can Vantage Mezzanine provide to private equity investors?

To date, sources of risk capital outside the traditional private equity format have been limited. Vantage Mezzanine is a new, independent source of risk capital in the South African marketplace. Private equity investors can use mezzanine to enhance their returns on new investments by reducing the amount of equity they need for a given opportunity. The intelligent use of mezzanine has become a critical success factor in private equity globally.

Moreover, private equity investors can improve their returns on existing investments by using mezzanine to refinance and re-leverage existing debt structures, thereby providing the opportunity for early IRR-enhancing returns on capital. Vantage Mezzanine can also provide an exit solution to private equity investors that are seeking to lock in an attractive return by structuring an exit which meets their requirements as well as those of the remaining shareholders.

Investment Criteria

Vantage Mezzanine is looking to invest between R50 million ($5 million) and R200 million ($20 million) in established mid-market and large companies with the following characteristics:

  • Typically EBITDA in excess of R25 million ($2.5 million);
  • A talented and committed management team with performance-based financial incentives;
  • Minimal or manageable technology risk;
  • Product lines with extended life cycles and low obsolescence risk;
  • A diverse mix of products, customers, geographic markets and suppliers;
  • Stable demand for products or services and a defensible market position;
  • Sound historical financial performance and stable, predictable earnings and cash flows;
  • An ability to service the interest and capital repayments with a significant part of the earnings converting into free cash on a normalised long term basis; and
  • Reasonable security in the assets of the company for the purposes of raising senior debt funding.

Up to 25% of the funds could be allocated to green-field opportunities.

Vantage Mezzanine will source senior debt as well as equity funding for a transaction using its well-developed network of relationships in order to complement its capital investment. In this way, it will be able to leverage its own capital enabling it to target transactions involving businesses with enterprise values of between R100 million ($10 million) and R5 billion ($500 million) plus.

What transactions will Vantage Mezzanine avoid?

The Fund will target most industry sectors but will exclude:

  • Primary agricultural businesses subject to significant weather-related volatility;
  • Low-margin, trading businesses;
  • Businesses not complying with local or international labour, environmental and other laws;
  • Businesses selling weapons or munitions;
  • Businesses producing or selling products subject to international bans or phase-outs;
  • Hostile takeovers;
  • Loss-making operational turnaround opportunities;
  • Start-ups such as technology start-ups or junior mining businesses;
  • Alcohol other than wine and beer; and
  • Casinos and gambling.

What types of transactions will Vantage Mezzanine target?

  • Expansion capital
  • Management buy-out (MBO) and buy-ins (MBI)
  • Black economic empowerment (BEE)
  • Replacement capital
  • Re-leveraging or refinancing

EXPANSION CAPITAL

Vantage Mezzanine can assist in funding the acquisition of another business or the expansion of an existing business. Mezzanine can be a highly compelling alternative for shareholders seeking to expand their businesses whilst avoiding excessive equity dilution.

MANAGEMENT BUY-OUTS (MBO) AND BUY-INS (MBI)

Vantage Mezzanine’s funding can complement private equity by leveraging private equity capital. In an MBO or MBI transaction, Vantage Mezzanine’s funding can also in some circumstances replace the requirement for private equity capital. Particularly in the smaller MBOs or MBIs, where exit risk is high, a mezzanine-based transaction may be better able to generate returns for all stakeholders than an equity-based solution that could be overly reliant on high-priced, difficult-to-achieve exits.

BLACK ECONOMIC EMPOWERMENT (BEE)

Vantage Mezzanine’s funding can assist BEE partners who lack capital to achieve their ownership objectives in a way which is cost-efficient and equitable. Mezzanine, with its focus on debt-based returns, can minimise the potential equity dilution for BEE participants and reduce the time for BEE investors to enjoy full unencumbered economic ownership of their assets.

REPLACEMENT CAPITAL

Mezzanine is often used to fund the exit of private equity investors in situations where management are seeking to maximise the value of their shareholding following such an exit.

RE-LEVERAGING OR REFINANCING

Vantage Mezzanine can fund the re-leveraging of existing private equity transactions, with mezzanine capital often replacing existing shareholder loans provided by the private equity and other leading shareholders. This helps shareholders boost their returns by facilitating an early return of capital while retaining much of the equity upside in a transaction.

Mezzanine Portfolio

Click here to see our full Mezzanine Fund portfolio in greater detail.