The Role of Mezzanine Debt in Creative Acquisition Structures

Ideal acquisition structure requires both a technical and stylistic approach, particularly for creative mezzanine debt design. A buyer can use the best market intelligence and conventional structuring principles, only for the mezzanine debt lender to render a thumbs down to the deal. Winning mezzanine debt deals approach the structural design as both an art and a science with practical wisdom woven into the fabric of market parameters. Just because the market says you can finance a deal a certain way using senior debt does not mean that you can add mezzanine debt at will.

For example, many buyers want to supplement senior debt with mezzanine debt to fill out their capital need without understanding ticket size limitations and credit sensitivities of mezzanine debt lenders. Creative deal structuring requires a rethinking of mezzanine debt capital as a price-based commodity. It is a transformational layer that can deliver massive value gains to the buyer who wants to fund acquisition growth. Rather than minimize its allocation, buyers should see this form of capital for the true value it delivers and maximize its usage in their deal.

Rather than skimp on the mezzanine, they should educate themselves in how mezzanine debt can leverage their own equity and provide capital muscle for acquisition growth. Mezzanine debt can add more flexibility to a company’s capital structure due to its balloon principal payment at the end of 5 years. It can also stretch down to the equity layer of the deal and fill a funding gap that is hard to fill. Most importantly, mezzanine debt can be borrowed in the future for acquisitions providing scalability benefit to serially acquisitive companies. Creative acquisition structures are best built with patient capital managed by responsible professionals. Mezzanine debt is a proven stalwart of reliable funding in the middle market that belongs in all acquisition structures.