http://blogs.wsj.com/privateequity/2012/08/23/partners-group-chart-should-single-handedly-make-every-debt-fund-oversubscribed/?mod=WSJBlog

This Partners Group Chart Should Single-Handedly Make Every Debt Fund Oversubscribed

By Hillary Canada

Partners GroupInvestors have been pouring into mezzanine and other debt funds in the first half of 2012 faster than beer pours into our glasses the hour after our magazine goes to print – and looking at this chart from Partners Group’s Private Markets Navigator it’s easy to see why.

To get similar yield from government debt as you might get from private-sector senior debt, you’d have to venture into bonds from that skittish trifecta of Spain, Italy and Portugal. Mezzanine investments return twice that, according to Partners Group.

Additionally, as Partners Group points out in its report, if private debt defaults, “an investor benefits from clear legal frameworks and bankruptcy procedures, while on the government debt side, the outcome of a restructuring is highly unclear and driven by political negotiations.”

We’ve seen a host of firms riding this tide of enthusiasm for debt instruments. This summer, Babson Capital launched not one but two new businesses to supply midmarket and energy mezzanine financing. Carlyle Group is also on the trail with an energy mezz fund, while Oaktree recently increased the size of its latest distressed debt vehicle.

Across the Atlantic, Triton Partners, Butler Capital Partners, Permira and 3i Group were also gearing to raise debt funds, our Private Equity News colleague Ayesha Javed reported last month.

It’s easy to see why firms are eager to get a piece of the action: the lack of access to traditional sources of financing -particularly in Europe - seems to ensure a ready supply of investment opportunities. In addition to a host of ’05-’07 era buyouts that need to refinance their debt, the investment period for those vintage year funds is quickly running out.

We talked briefly with Partners Group’s Scott Higbee about what the impending expiration dates might mean for deal flow in the next six months to a year.

“Use it or lose it is what we see right now, regardless of what GPs may tell investors or potential investors,” said Higbee. “A lot of people are anxious to get transactions done. That’s part of what is propping up pricing in certain areas of the market. ”

“If you look at large-cap transactions, anything of quality is trading at double-digit EBITDA multiples,” he said.

However- once those investment periods, and their extensions (of which there have already been many) run out, there could be some bargains on the horizon. According to the report, Partners Group expects “to see a turning point within the industry in the midterm, where cash-rich 2005 to 2007 vintage funds will stop competing for new investments, focusing instead on reserving uncalled capital for potential follow-ons and costs. In the medium term, this should gradually reduce competition for investments and ultimately benefit well capitalized ’leaders.’”

For more on Partners Group’s Private Markets Navigator, click here.