Mezzanine and private equity are tools for corporate growth. When properly deployed, both can increase the value of a company. They are best understood as layers of capital in a company’s balance sheet. The bank loan occupies the senior level. The equity occupies the lowest level. The mezzanine, as at most stadiums and theaters, is situated in the middle between the two. Private equity means investment from a private equity group, wherein they become the new owner of the company. Private equity investors are funds that buy companies and seek to grow them to increase their exit value.
Firms like Bain and Summit are two are the more successful funds. These firms and many private equity firms like them have evolved from being mere take over artists to becoming true business builders. They focus on elevating the various disciplines of each company including its management, internal systems, and level of innovation. Mezzanine funds are focused on lending to companies to fund acquisitions or growth. Mezzanine lenders use investor like criteria when evaluating borrower’s creditworthiness. This enables them to write much bigger checks than other types of lenders and to have longer terms. Their loan amount is a high percentage of the exit valuation of the business. Mezzanine lenders are aggressive and smart and are able to lend to companies that lack assets and have a few blemishes on their record.
The mezzanine market is a large, national market with an estimated 500 firms. Over the years, Private Equity and Mezzanine have worked together to support the capital needs of growing companies across the US. While most deals involve buy-outs, a large percentage of mezzanine deals involve supporting the growth capital needs of emerging companies. As bankers continue to focus on only low risk, collateral type situations, mezzanine lenders provide true risk capital to companies on their way up. They are an invaluable part of the US financial ecosystem and will continue to grow in importance as banks become increasingly less relevant.