Is Mezzanine Debt the Right Choice for First Time Buyers?

Mezzanine debt is a strong choice for first time buyers due to its balanced and patient approach.
As a hybrid type security, it embeds equity-like creativity into a conventional loan structure, providing more elasticity, customization and timespan.
The goal of the mezzanine debt provider is to align with a founder-owned company and help it scale through strategic funding.
Once the initial acquisition or growth is achieved, the mezzanine debt lender is derisked due to increased cash flow, allowing them to be repaid.
Many first-time buyers, especially acquirers pursuing roll-ups, need continuous access to acquisition financing, which mezzanine debt loans can provide.

Mezzanine Debt Flexibility and Roll-Up Support

Due to their ability to tailor a debt structure to the acquisition needs of the borrower, companies have tremendous funding firepower to close multiple deals in a string of roll-up acquisitions.
Through setting an EBITDA-driven debt posture, mezzanine debt providers can continuously reset the edge of the debt structure, as more cash flow is acquired.
Mezzanine debt has bellows-like flexibility, either expanding or contracting to the need of the borrower.
First time buyers, especially those leveraging their rollover equity value, appreciate this scalability which can fund 100% of acquisition need as long as the leverage multiple is intact.

Cost, Upside and Founder Value Creation

The price for this flexibility comes in the form of an interest rate (11% to 13%) and a small equity warrant (<10%).
Given the huge amount of acquisition value to be created with mezzanine debt, especially a structure providing continuous facility upsizing, its cost is low relative to the gains for the founders.
It is common for founders to increase their equity value greater than 10x, riding the acquisition growth provided by the mezzanine debt express.
Investment bankers, with strong relationships, structuring and transaction support skills, are key to taking this journey.
They help shape the growth story and design the debt structure to make access to capital frictionless.