Mezzanine Debt and Private Equity

Posted on: May 14th, 2014

Mezzanine Debt vs. Private Equity If rightly used, both mezzanine debt and private equity can be extremely beneficial tools for corporate growth and can increase the value of the company. Both are long-term financing options available to companies with stable EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) levels who can safely service higher levels of debt. However, there are several key differences between the two.

Mezzanine Debt

Mezzanine debt, also known as subordinated debt is a hybrid of debt and equity financing and allows buyers to retain major control of the business. It comes with moderate risks and costs.
Unlike senior debt, which comes with a highly structured amortization schedule and relatively short maturities, mezzanine debt financing offers more flexibility in coupon structure, terms and amortization and can be customized to provide for specific financial needs.
It is most appropriate for businesses that are cash flow rich or those that lack the business assets to gain finance through bank financing alone.

Private Equity

An equity investment provides capital by allowing the investors to become partners in the business with decision-making rights, where the future profits will eventually repay the investor. It comes with high risks and costs.
Private equity investment ensures that the company is well capitalized for future growth. However, on the downside, a significant amount of equity, possibly as much as a 85 percent of majority stake, may have to be given up.
It is most suited for companies operating with limited tangible assets or for those that have maximized their borrowing potential.

Mezzanine debt or private equity can be efficiently employed on its own or in conjunction with each other in varying degrees for any given transaction, including funding of acquisitions, management buyouts or expansion plans. In the US, private equity and mezzanine have worked together to support the capital needs of numerous growing companies across the country. By providing growth capital to companies on their way up, mezzanine debt financing providers have successfully bridged the gap for companies that lack the required assets needed for senior debt, but still wish to retain the majority stake in their business.

While seeking mezzanine debt or private equity investment, is important to engage the services of an experienced financial advisor early in the process. Attract Capital, a reputed financial advisory firm with a 25-year old knowledge base of the private capital markets can provide you with vital advice on the best structuring criteria and lender preferences. Working with over 100 mezzanine debt financing providers and following a dedicated workflow process, Attract Capital can provide quick sourcing solutions for your mezzanine debt financing needs.

Contact us today to speak to one of our advisers and set up a free consultation to get to know about your various options.

During their underwriting processes, acquisition financing providers analyze probable performance projections for their proposed borrowers. The underwriter often toggles between a few scenarios to sensitize the growth variables leading to slower revenue and margin growth over time. The lender’s underwriting view is usually an extension of its credit intelligence and historical experience.

Mezzanine debt loans occupy the risky echelon beneath the bank but ahead of the equity in a capital structure. They are naturally subordinated to the bank loan via an intercreditor agreement wherein the senior lender retains the power to block their interest or force them to standstill.

In the middle market, acquisition financing providers are regarded as super intelligent and hardworking. They have distinguished themselves at elite banks or consulting firms and possess the ability to synthesize voluminous levels of info into a coherent, succinct takeaway or observation. This skill is extremely valuable in attributing causation to business drivers in a financial model used to foretell the future.