Posted on: July 21st, 2020
Mezzanine debt lenders tend to come in two forms. Those that provide financing for private equity led buy outs, and those that like to supply capital directly to independently owned companies or independently sponsored buyouts. The former type of lending is more of a commodity where the mezzanine debt lenders fits into a prefab debt structure and is merely money at a price for the private equity investor. The later type of lending is a more specialized and creative discipline as the mezzanine debt lender is usually the only institutional supplier of capital to the company. This type of relationship requires more work as it means the lender must roll up their sleeves and work more closely with the borrower to arrive at the right structure and close the loan. One of the primary value adds of a mezzanine debt lender is to supply growth capital for any number of uses.
Mezzanine debt lenders subscribe to the growth of your enterprise, and actually require faster growth for their repayment and ultimate returns to be satisfied. Growth capital is more than just how a bank may define it with a stodgy view of purchasing hard assets.
Growth Capital in the Mezzanine Debt World
Growth capital in the mezzanine debt world is more broadly and conceptually inclusive of all ways to grow. It can be through organic or inorganic means. Within the organic realm, it can be new products, regional expansion, or innovation. Within the inorganic realm, it can be acquisitions of any type of asset or business. Moreover, growth capital can be invested in both internal growth and acquisitions simultaneously which often creates a compounded higher rate of growth.
The important thing to note is that the growth strategy complements the existing business and use the strengths of the existing business to achieve it. The key in deciding the proper uses for your growth capital is in deciding the long-term strategy, and then pinpointing the most effective way to get there.
Often this breaks down to a make internally versus acquire externally analysis, and this extends further into figuring out the execution path and risk of each step. The goal is to optimize the growth of the company into higher value-added activities while mitigating the omnipresent level of execution risk.
When you think deeply about how to spend your growth capital dollars, it can lead to a refreshing new view of your business. Your resource base is the ultimate constraint on your growth, so pinpointing both your resource depth and mobility, and solving for this equation is the proper assessment framework.
Here are the Attract Capital Top 4 Uses of Growth Capital from Mezzanine Debt.
- Complementary acquisition – These deals usually materially increase the size of your business and bring new growth paths into your line of sight. If properly diligenced financially and operationally, it can lead to a large scale up in enterprise size and value.
- High Growth Product launch – Companies all have star like products that do not get the right product management or salesforce focus internally. By allocating capital to building a separate product and sales team for an existing product, you can create a new bestselling product.
- Innovation – By investing in product development and market research, you can be well positioned for future growth. It can lead to a high level of enterprise awareness quotient and allow you to lead the market change.
- Hiring and Developing the Best People – Middle market companies are often too small to have fully fledged HR and live or die on their ability to hold on to their best talent. By finding the best people and investing in them, you can mitigate employee turnover risk.