The Value of Quasi Equity

Quasi Equity describes a form of capital with debt-like properties and equity-like functionality. This form of financing allows the issuer flexibility to have their cake and eat it too.

The capital is less expensive than straight equity, yet provides virtually the same level of value add as a straight equity investment. Specifically, it can be mezzanine debt, convertible debt, structured equity or preferred equity.

One differentiator denoting quasi equity is the role that periodic interest payments and dividends play. Often a large percentage of total return for the quasi equity provider is provided through current interest and dividend payments.

This reduces the level of non-current return required so that the instrument is less dilutive than straight equity. With straight equity, the investor realizes no current return and hence 100% of the return is provided on the back end through an exit.

This makes straight equity quite expensive from an owner’s standpoint. Most straight equity investors target 20% per annum as a targeted return.

To achieve this without any current return, they need to own massive amounts of shares, which is highly dilutive to a company.  Quasi equity is generally considered as equity from an economic standpoint though it may be classified as debt on the balance sheet.

Like equity, it is largely unsecured in the capital structure and is considered junior to any bank debt. Quasi equity evolved out of the need for more bespoke layering within transaction structures.

With the emergence of non-sponsored equity groups, search funds and founder operated companies, the need for less dilutive, highly functional unsecured financing has arisen.

These groups tend to invest smaller levels of cash equity and seek ways to stretch their capital across a larger transaction value. Quasi equity providers fill a very valuable role, as they provide deep levels of risk capital with attractive pricing and structural flexibility.