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Loss rates in the European mezzanine market30/07/2008. Source: Partners Group. Christian Ebert, Dr Michael Studer 
 The European mezzanine market offers attractive investment opportunities across different economic environments. This paper investigates the loss rates of European mezzanine investments using transaction data from 229 fully realised mezzanine investments made during the 1989-2001 time period. Partners Group shows that the loss rate is overall very low but exhibits significant year-over-year volatility. Building portfolios that span multiple vintage years improves risk-adjusted returns significantly.
Introduction
Mezzanine is a private hybrid loan instrument with returns largely characterized by its fixed income component. As with any fixed income security, the contractually fixed portion of returns must be seen in the context of potential losses to assess the attractiveness of investments.
Although the European mezzanine market has grown more than seven-fold since the onset of this decade, reaching a volume of almost EUR 13 billion in 20072, the amount of insightful performance data on mezzanine investments remains limited as most of this strong growth occurred during the economic expansion since 2004 and many of these recent transactions are still (partially) unrealized. Moreover, performance data of recent investments that have already been realized is dominated by short-duration investments, i.e. early winners that are realized within less than two years, and thereby offers only limited insights into the performance of mezzanine investments across different economic cycles.
In order to gain insights into the performance of European mezzanine investments across different economic cycles, a unique data set was constructed comprising more than 500 European mezzanine investments 3 made by dedicated mezzanine providers between 1989 and 2007.
In order to avoid the ambiguity around the valuation of unrealized investments as well as the impact of short-duration investments, the analysis below considers only the subset of 229 fully realized mezzanine investments made between 1989 and 2001. Investments made between 2002-2007 have been excluded, as they exhibit a realization proportion of below 50%.
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Partners Group is a global alternative asset management firm with over CHF25 billion in investment programs under management in private equity, private debt, private real estate, listed alternative investments, hedge funds and alternative beta strategies. The firm manages a broad range of funds, structured products and customized portfolios for an international clientele of institutional investors, private banks and distribution partners. Partners Group is headquartered in Zug, Switzerland and has offices in San Francisco, New York, London, Guernsey, Luxembourg, Singapore, Beijing, Tokyo and Sydney. The firm employs over 300 people, is listed on the SWX Swiss Exchange (symbol: PGHN) with a market capitalization of over CHF 3.5 billion and majority owned by its 38 Partners & Principals and employees. For more information about Partners Group visit www.partnersgroup.net
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