The Duality of the Mezzanine Debt Perspective

Posted on: November 9th, 2023


Mezzanine debt lenders provide large capital infusions to businesses at a historically important point in their development such as an acquisition, new market launch, or buy-out. Intelligent use of a mezzanine debt structure can provide a large capital boost at a lower cost than raising equity from investors. Mezzanine debt use is particularly impactful as a one-stop source of capital, providing a company valuable growth capital that is a hybrid of a loan and equity.

In certain situations, mezzanine debt lenders can be a long-term source of funding for a company, scaling to meet financing needs over the course of many years. A dual risk is assumed by the mezzanine debt lender, a risk of default and a risk of growth. They worry about the company being able to service the debt. They also worry about the company’s EBITDA not growing fast enough.

How Mezzanine Debt Lenders Think

Given this duality, mezzanine debt lenders often shift from thinking like a lender to thinking like an equity investor and back again over the course of a lending relationship. Sometimes borrowers receive mixed messages that make it hard to discern what the lender really thinks. This duality of mezzanine debt lender perspective is normal and is caused by the changing risk profile of the company as it goes through its lifecycle.

Early on, scaling up and gaining mass is important to the lender. Later, increasing margins and profitability become paramount. Borrowers should maintain a healthy relationship with their mezzanine debt lender so you can understand the shifts in perspective. Sometimes these shifts occur for market reasons and are outside of the control of the borrower. Over the long term, the duality of mezzanine debt perspective is a positive influence on the company’s growth strategy. It forces the borrower to focus as much on profitability as it does on scalability and mitigates the tendency to grow at all costs.