Mezzanine investors manage funds that provide subordinated debt to companies in need of financing.
PURPOSE OF MEZZANINE FINANCING
Mezzanine loans fill the gap between equity and debt and are often used to finance leveraged buyouts, to recapitalize a company’s balance sheet or to fund internal growth strategies. Mezzanine loans have thus become a common alternative to conventional subordinate financing where the terms of a first position loan prohibit junior liens.
MEZZANINE FINANCING STRUCTURE AND TERMS
Mezzanine loans are typically utilized in conjunction with equity capital and senior debt and would rank second below senior debt, but above equity in the event of bankruptcy. Mezzanine loans are therefore a more expensive source of financing than senior debt because of the increased credit risk. Consequently, a mezzanine financier is generally looking for a 16 to 30 percent return on investment.
Most mezzanine deals have a life of about three to seven years with the bulk of the principal often paid toward the back-end of the loan. In addition to an interest payment normally associated with debt, mezzanine loans will often include an option for an equity stake in the company in the form of warrants to convert the debt to equity much like that of a convertible bond.
FIND A MEZZANINE INVESTOR
Private Equity Info (www.PrivateEquityInfo.com) provides an excellent, comprehensive database of mezzanine investors. Private Equity Info’s mezzanine investor data module is searchable by state and by firm name.