NM Rothschild & Sons and dd2group last week unveiled a new mezzanine lending partnership. The co-funded vehicle of Rothschild and property finance and insurance specialist, dd2 seeks to partner entrepreneurial property companies by providing mezzanine funding. This is a form of finance which sits between senior debt and equity capital.
The pair revealed that in the last five months they have already co-funded in transactions valued at more than £100m and they expect to be involved transactions with a gross value in excess of £200m by the end of 2007. Initial transactions have been UK focused but there is an appetite to expand the business into Europe.
The venture is targeting small to medium sized property companies by providing mezzanine funding for transactions totalling between £5m and £50m. This has been a particularly active segment of the market but these smaller sized transactions have not traditionally been the focus for larger UK lenders.
In terms of risk and reward, mezzanine finance falls between senior debt and equity and is often used in conjunction with both to increase the total loan without significant dilution of ownership. Mezzanine finance also improves the internal rate of return as it is significantly cheaper than equity.
Rothschild managing director, Andrew Radkiewicz said: "The mezzanine finance market is currently very fragmented. Our joint aim is to become known as a principal lender in this sector."
"Over the years we have developed a close working relationship with dd2group having worked on over £1bn of transactions together. Our decision to co-invest with dd2's capital partnering arm is a reflection of our respect for dd2's extensive network of property clients and skills in accessing senior debt."
David Birchenall, chief executive of dd2group, said: "Rothschild has an enviable reputation in property finance and we are very pleased to be working with them. The days of purely riding yield compression have ended. Asset management skills of not only property but capital will be key to delivering strong returns.
"We believe the combination of our strengths gives us added firepower and makes us a cost effective choice for property companies to source mezzanine capital."