Tips to Qualify a Mezzanine Lender

In the ecosystem of middle market lending, there are many types of lenders. Some have been around for decades and have established a clear value proposition for capital desirous companies. Others are recent entrants on the scene, and are a bit more situational and opportunistic in their approach. Many new debt funds especially those backed by family offices or hedge funds are transactionally oriented and have a clear focus on returns.

These lenders see the middle market as a place to generate above market, risk adjusted yields and are less interested in establishing long standing relationships with borrowers. Other lenders, such as Unitranche providers, see deals as slotting into their LTV formula. Given they lend primarily into private equity backed deals, they are somewhat rigid and less able to consider more independent sponsored transactions.

While both of these types of lenders could call themselves providers of mezzanine debt, they are foundationally and functionally very different from a traditional mezzanine debt lender. So, what are the best ways to identify a true mezzanine debt lender?  Here are 4 ways to tell if the lender you are talking to is truly a high value-added mezzanine debt lender.

1. They are a SBIC – most middle market mezzanine debt lenders began or continue to be SBIC’s. This means they participate in the SBA program whereby they are backed by low interest rate, government funding.  SBIC’s are good long-term providers of mezzanine debt capital and tend to be very relationship based.
2. They are over 10 years old – most quality mezzanine debt lenders have been in business for over 10 years and have been through several credit cycles along the way. They have experienced the thrill of victory and the agony of defeat in their portfolio.   They are seasoned in a way that gives them higher level credit judgment and are better able to deal with the inevitable surprise.
3. Experience supporting management – the best mezzanine debt lenders have gone through a difficult period with one of their borrowers. Often management, despite their best efforts, can get into a tough spot with the business due to an industry issue.  Good mezzanine debt lenders are supportive to management and allow them the time and space to get things back on track.
4. They are good people – The best mezzanine debt lenders are humble, stick to their knitting type professionals.  They are people you can relate to and who can inspire trust.   They are not looking to squeeze every last drop of return out of the loan, but are genuinely interested in helping to fund your scale-up vision.