Mezzanine Finance

Describes the use of mezzanine techniques in the leveraged finance world. Mezzanine finance straddles the equity and debt world. It is a flexible form of funding, typically used in a leveraged buy-out or growth financing to achieve a desired risk/return profile for both business owners and investors.   Mezzanine finance uses private equity valuation methodologies to place a market value on a company, allowing them to lend a high percentage of the value.  This methodology uses a multiple of adjusted EBITDA, 3.5 times to 4.5 times to calculate the total mezzanine finance available for a transaction.  Due to its ability to deliver larger funding amounts using this approach, mezzanine finance is widely used in both acquisitions and growth scenarios.  These transaction types require the lender to provide a large capital infusion based on future growth, hence making principal repayment dependent on cash flow scaling.   Mezzanine finance is always junior to a bank loan in a transaction structure making it riskier for the lender and requiring a higher rate of return.  Providers of mezzanine finance have much in common with equity investors with respect to growth and operational knowledge. They are an ideal capital provider for a fast-growing company with a strong cash flow because they can increase the size of their loan based on periodic EBITDA growth.  Mezzanine finance is a high-quality form of long-term capital that provides financial support and long-term guidance at a lower cost than equity investment.