Quasi-Equity financing is debt that appears, in some aspects, as an equity investment. Characteristics of quasi-equity financing would include either being an unsecured loan, or being a flexible loan repayment schedule. Mezzanine debt and junior debt are examples of quasi-equity financing as they are both usually unsecured and flexible when it comes to the repayment schedule of the loan.
Quasi-equity investments are usually based on the company’s future cash flow growth. The lender must use projected cash flow statistics of the company they are investing in, and they base the structure of the quasi-equity investment upon what the future cash flow stream is going to be.
Quasi-equity financing is used when debt financing and share capital are not possible options of financing. Quasi-equity is dissimilar to a loan in the sense that quasi-equity financing is dependent upon how the company performs in the years to come.
If the company fails to reach the expected performance benchmark, the investor receives a significantly lower return. However, if the company goes through a more profitable growth stretch than expected, the investor receives greater financial return.
Quasi-Equity Financing is dependent upon how the company does in the future, which means the investors must have as much data as possible in order to minimize the risk that is possible when investing in a company.
It is also possible to place a ceiling on the possible return, if a company does exceptionally well in the future years there will be a payment cap that does not allow the investor to receive anything more than what the capis regardless of how well the business preforms. Quasi-equity financing is beneficial to companies that are not looking for a direct bank or equity loan.
The risk of quasi- equity investing is presented with an equal amount of possible reward.