Mezzanine investing

There has been a lot of negative publicity recently regarding mezzanine investing. This has largely been due to the collapse of a large mezzanine investment company resulting in many investors losing their entire investments. So what is mezzanine investing, and is it suitable for any of your clients?

Mezzanine investing refers to a specific type of investment where investors put their money into projects and ventures that are financed from outside the mainstream financial markets. This means that this type of investing is not regulated by the same financial services laws that protect investors who invest in shares, superannuation and managed investment funds. While mezzanine investing is outside the regulatory bounds of other types of investing, it is nevertheless legal.

Mezzanine investing works by seeking investors to invest in say a new property development where the banks will only lend a certain amount according to the level of risk for which they are prepared to accept. The mezzanine investors put up the next level of capital while the property developer will usually provide the remaining level of capital. This means that if the property development gets into trouble, the bank will be repaid firstly from any money raised from the liquidation of any assets. Only if there is any money left after the banks have recouped their investment will the mezzanine investors be paid. As mezzanine investing involves a higher level of risk, a higher return is expected by the investor.

Another feature of mezzanine investing is that it is a very illiquid investment. Property developments can take a long time from start to completion and also take time to sell. These investments are not as liquid as shares, listed property trusts or managed investment funds. However, having said that, experienced mezzanine investors can often make a lot of money through these schemes.

Who should invest in mezzanine investment schemes?
Mezzanine investments should only be used by experienced investors who have a good working knowledge of the property development marketplace. The more important question here to ask is perhaps who should not invest in mezzanine schemes?

• ‘Mum and dad’ or unsophisticated investors.
• Investors who have not got a diversified investment portfolio.
• Investors who need liquid assets, or who do not have a longer term investment horizon.

As the recent case of a mezzanine investment scheme collapse shows, it’s important for your financial planning clients to have a clear understanding of the investment that they are putting their hard earned money into. And they should never overexpose themselves to such investments, even if it does appear, on the surface at least, to be a relatively safe investment. Diversification should always be the key. There have been a lot of hard luck stories of people losing their life savings with the recent mezzanine investment scheme collapse, but if those advising them had been doing their jobs properly and had their clients’ best interests at heart, then there would not have been the heartache that the collapse of this scheme has caused.

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