The Importance of Internal Deal Development in Mezzanine Debt

Posted on: July 22nd, 2021

mezzanine debt

Mezzanine debt is a high-powered form of capital capable of forging business transformations. The ability of mezzanine debt to support corporate scale-ups is proven. It gives rapidly growing companies more funding to achieve a higher transitional growth rates through acquisitions or accelerated organic growth. It is useful as a form of quasi-equity, giving the company the ability to fund growth, acquisitions or buy-outs, without suffering tremendous dilution. There are hundreds of quality purveyors of middle market mezzanine debt across a spectrum of debt platforms.

Internal Deal Development in Mezzanine Debt

The key in using it lies in the hard work of internal deal development, in the assessment of different ways it can be applied to your specific situation. This deal development involves deep dive strategic thinking about growth, ownership, and capital adequacy. This internal deal development makes or breaks the success of your mezzanine debt financing. Many middle market companies see mezzanine debt in solely a transactional light, as a means to an end in plugging their sources and uses. The Companies that take the time to explore how they can harness its transformational power are the true mezzanine debt champions. Here are the Attract Capital top 4 deal development strategies for optimal use of mezzanine debt.

  1. Funding a management buy-out – mezzanine debt lenders go deep enough to cash out a majority owner provided there is rollover equity or a sizable seller note. Rather than raise expensive equity from a private equity fund, mezzanine debt lenders can provide your management buyout funding need.
  2. Roll-up Acquisition – As long as the acquiring company has equity value or an intelligent acquisition deal structure, mezzanine debt lenders can provide initial as well as ongoing funding of add-on acquisitions. They are also able to provide acquisition facilities to the more aggressive roll-up companies.
  3. Funding Aggressive Expansion – most high growth companies lack hard assets to easily obtain financing from a bank. Their growth involves investment in soft costs such as people, development expense and marketing costs.  Mezzanine debt is perfectly suited for this type of scale-up as they intuitively understand the complex interplay of growth factor inputs and timeframes.
  4. Combination of the above – often companies pursue acquisitions and organic growth concurrently and need a financing package that supports both simultaneously. Additionally, some companies pursue a partial buyout and acquisition of another company at the same time.  As long as there is underlying equity value and cash flow that meets parameters, mezzanine lenders are great sources of capital.