The handful of recently launched mezzanine funds will likely benefit from rising rates and inflation fears, according to private equity observers. "The outlook is better than it has been," said Howard Gellis, senior managing director at The Blackstone Group. Gellis runs Blackstone's mezzanine group, which closed a $1.06 billion fund in May. The Carlyle Group also closed a mezzanine fund, its first, at $436 million.

That both closed in May is purely a coincidence, but the funds are now positioned to retake deals from second-lien lenders. Rising LIBOR rates make second lien more expensive to issuers, and mezzanine, with fixed-rate and flexible payment provisions, more attractive. "With LIBOR plus 7.525 and rising, that swaps out to 13%," Gellis said. "It looks as expensive as mezzanine. If the Fed makes more moves it's only going to get better."

Banks are now thinking twice before issuing second lien paper, and the market seems to be cooling, said Leland Lewis, a partner at Key Principal Partners' offices in Greenwich, Conn. Key recently held a first close on $435 million for its hybrid equity and mezzanine fund.

"The old hands in private equity, those who were around for the last downturn, understand the risk involved," Gellis said. "They don't know how hedge funds, the primary second lien holders, are going to behave."