Ashburton Investments has successfully reached the first close of its inaugural mezzanine fund, raising R507.5m from four investors, according to Ashley Benatar, Head: Mezzanine Finance.

Ashburton Mezzanine Fund I is targeting a final close of around R1bn and will invest in opportunities in South Africa with an allocation of up to 20% for investments in Botswana, Namibia and Zambia.

Benatar said: “The fund is targeting returns of around 20% from investments that achieve current income (in the form of interest) and longer-term capital gains (in the form of equity upside) from a portfolio of investments ranging between R75m and R150m each.” 

“The fund will focus on investing in established mid-market or large companies with profitable track records and experienced management teams. Fund investments will benefit from downside protection based on superior ranking relative to equity investors, and contractual rights that are associated with debt instruments, such as financial covenants, step-in rights and security,” he said. 

“The equity kickers are structured as self-liquidating instruments which are redeemed on maturity of the mezzanine loan which reduces the reliance on a liquidity event, such as an IPO or trade sale, in order to return capital to investors,” he added.

According to Benatar, besides for the team’s strong proprietary networks to originate transactions Ashburton has the added benefit of deal flow from the FirstRand Group.

“We have had two market declines already in the last 10 years, both with prolonged recoveries which has resulted in low growth and a lot of uncertainty in traditional investments such as equities. This has provided a boost to alternative investments such as Mezzanine debt funds as investors seek to find higher yields,” he said.

Given the security and covenants that are in place on a mezzanine investment, the Fund offers investors close to equity returns whilst taking debt like risk. 

Thus, on a risk adjusted return basis, mezzanine debt offers investor a compelling alternative to traditional assets.

From an investee perspective, banks have reduced their appetite for mezzanine and have continued deleveraging due to higher regulatory capital requirements and funding costs. 

Companies can look at private equity as an alternative, however this comes with a hefty equity dilution which is avoided with mezzanine funding.

Benatar said: “The team has a strong pipeline of transactions and we would be hoping to close our first transaction in the next few months.”