News

July 31, 2000

Norwest Equity Partners Launches $250 Million Mezzanine Fund

Norwest Mezzanine Partners focusing on established firms

The below article was printed in the July 31, 2000 issue of
CityBusiness, The Business Journal of the Twin Cities
Minneapolis-based Norwest Equity Partners is launching an affiliated mezzanine financing partnership and has raised $250 million for its first fund.

Norwest Mezzanine Partners will be run by Mike Hall, formerly a partner at Churchill Capital Inc. of Minneapolis.

Hall said creation of the mezzanine fund is well-timed because “demand for mezzanine capital is at an all-time high. The timing to enter the market could not be better.”

Mezzanine debt is subordinated, or junior, debt that is a greater risk for the investor because it is repayable only after senior debt has been paid. But higher risk brings higher return. It is normally used for recapitalization, acquisitions, buy-outs and growth financing of established companies.

Demand is high, Hall said, because there is less money available from banks providing senior debt in the form of traditional bank loans. Also, the high-yield bond market, which would be the other traditional source for money in the buy-out market, is drying up.

Banks are being more conservative as interest rates rise and the economy softens. Meanwhile, the nation’s high-yield bond mutual funds are losing deposits.

With less senior debt available, more mezzanine debt is needed to bridge the gap between available senior debt and the equity financing going into a deal.

Barry Lindquist, senior vice president at Churchill Capital, said the mezzanine lending market has been “very active since the fall of last year.”

He, too, cited a more conservative lending pattern by banks in the buy-out and acquisition market, creating a greater need for mezzanine debt to complete the financing necessary to finish deals.

“There has been more deal flow and more good quality deal flow. In general, the market has been much more buoyant and fervent than it was a year ago,” Lindquist said.

At Churchill, he said, partners have been saying, “The month of May is the best year we’ve ever had,” because the robust market allowed them to make about $51 million in investments.

Hall said Norwest Mezzanine Partners won’t compete directly with Churchill because it will be going after somewhat larger opportunities, doing deals in the $20 million to $30 million range, while Churchill is focused more on deals of $20 million or less.

Lindquist said the firms probably also will have “different appetites” for the type of deal they conduct.

Hall also said the nature of the mezzanine market is such that mezzanine firms find themselves partnering on deals as often as they compete because the amount of mezzanine money needed is more than a single firm wants to finance.

“From a competitive standpoint, no one will be concerned that we’ve entered the market,” Hall said.

This year alone, several large national mezzanine funds have been launched, including a $1.6 billion fund at Donaldson, Lufkin & Jenrette and $1.2 billion raised by Merrill Lynch.

Norwest Mezzanine Partners already has completed two deals, in both of which Norwest Equity Partners provided equity financing. Norwest Equity Partners is in the process of investing its latest fund, which has $800 million.

Timothy DeVries, a general partner at Norwest Equity Partners assigned to work closely with Hall, said the mezzanine partnership was created not only because it is a good business to be in, but also because it will complement the equity partnership.

“We’re approaching our traditional market with a new tool. We can be more effective in the marketplace because we are better armed,” DeVries said.

Churchill’s Lindquist said it is not unusual for equity firms like Norwest Equity Partners to develop a mezzanine fund in order to have that side-by-side financing to complete deals.

Both Hall and DeVries said the mezzanine fund will invest nationally, but will be on the lookout for good local deals.

“Minnesota and the Midwest are good places to do business, and we will place an emphasis on it, but we are a national business,” Hall said.

In addition to Hall, who has been on the job for two weeks, Norwest Mezzanine Partners will be hiring at least one or two more people. Hall said the final makeup of the team will depend on how the business develops.

Norwest Equity Partners (NEP) is a leading middle market investment focused on partnering with business owners and building companies into industry leaders. With a reputation for quality investments and exceptional financial returns since 1961, NEP manages nearly $5 billion of capital through a series of equity and mezzanine funds. Offering creative and flexible transaction solutions through management buyouts, recapitalizations and growth financings, NEP seeks $30-$150 million equity investment opportunities for growing and profitable companies within the agriculture, applied technology, business services, consumer products and services, distribution, healthcare and industrial industry sectors. NEP is headquartered in Minneapolis, Minnesota; please visit nep.com for more information.