Private Equity with a Mezzanine Dialect

After the normal introductions and welcomes at my first staff meeting at CalPERS back in June, the discussion quickly shifted into the language of private equity…and I was lost. “How does the waterfall work?” “They have the stalking horse position for that company.” “The warehouse facility was in covenant default after the haircut.” It felt like I was caught somewhere between a Finance class and a coffee house recitation of Jabberwocky in rounds.

My internship this summer is with the Alternative Investment (private equity) Management group at the California Public Employees’ Retirement System. The main project that I’ve joined is an analysis of a potential program allocation to mezzanine debt. Defined in its broadest sense, “mezz” is any part of a company’s capital structure between senior 1st lien debt and common equity. Depending on who you talk to, mezz delivers either “equity returns with debt risk” or “debt returns with equity risk.” Part of my summer project is developing an answer to who is right, when.

While I’m certainly not fluent (I had to look up MOIC the other day), I’ve become functional in private equity and practically proficient in the mezzanine dialect. I can now say “PIK toggle” without stumbling and “open kimono” without blushing.

More importantly, with the concepts and methods that I learned in the core Finance and Corporate Finance classes as a first-year at the GSM, I actually grasp what’s going on in the deals and can contribute to the analysis. My understanding of how a PIK toggle functions in a sub-debt deal and probable impact on the up- and down-sides depends entirely on what I learned from Professors Yetman, Barber and Scherbina.

(Note to self: say thanks next time I see them.)