Rothschild says halfway to 400 mln euro SME debt fund goal

PARIS Thu May 16, 2013 6:05am EDT

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PARIS May 16 (Reuters) - French boutique investment bank Rothschild said on Thursday that it had raised 235 million euros ($302.26 million) for a debt fund in a bid to capitalise on its expertise in advising mid-market European companies.

The fund, to be formally launched this week by Rothschild's merchant banking arm, is the latest in a series of investment vehicles aiming to profit from European banks' withdrawal from lending to many small- and medium-sized companies.

The Five Arrows Credit Solutions fund expects to double its fundraising to over 400 million euros at some point after the summer as institutional investors join the high net worth individuals who have already invested, officials said.

"We have a target of 400 million euros on the cover of our marketing material and are confident that we will achieve and indeed exceed this in line with our initial expectations," said Martin Hook, one of two mezzanine fund experts Rothschild hired last year to manage the fund.

For Rothschild's merchant bank, which has some 3 billion euros under management, the fund is the latest effort to build its presence in the mezzanine lending space, which it has been pursuing with its own funds over the past several years.

Mezzanine funds invest in the least safe side of a company's debt spectrum in exchange for higher returns that appeal to yield-hungry investors.

"The companies we invest in are pressed by a variety of constraints, although they are very good ones and very profitable," Marc-Olivier Laurent, senior managing director of Rothschild's Merchant Bank said in a phone interview.

"Banks are retreating, private equity will not do more than half the financing structure of a transaction and therefore there is a big hole in between, which can only be dealt with by flexible financing instruments."

The fund will differentiate itself from competitors by targeting companies with an enterprise value of between 100 and 750 million euros, which unlike their larger counterparts do not have the option of issuing high-yield bonds.

"This is a place where basically conventional banking finance has almost disappeared, where the competition is mostly country-specific and not pan-European funds," Laurent said. "And we believe we have a specific competitive edge in that respect."

The fund has already been in talks with a number of potential investment targets, although no deals have been closed pending the formal launch this week, executives said.

Managing the fund will be Edouard Veber, a former mezzanine fund specialist at JPMorgan Chase and Hook, who joined Rothschild last year from a fund called Indigo Capital.

A focus for the fund will be 'unitranche' deals, a blend of senior and mezzanine financing which is an alternative to a syndicated leveraged loan, mainly for small- and medium-sized borrowers.

"The profile of the companies we look for is extremely cash-generative," Laurent said. "Those companies turn to that kind of credit not because it's cheap but because it's very flexible."

Companies typically use such debt for transactions from management buyouts alongside a private equity bidder to acquisitions or other expansion plans, Rothschild officials said.

($1 = 0.7775 euros) (Reporting By Christian Plumb; Editing by Helen Massy-Beresford)

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