The

Growth Capital

Guide

Leveraging

Mezzanine FinancingFor Growth

Mezzanine Financing

Overview

What is it?

Example of Mezzanine

Financing

When to use it?

Common structures

What lenders look for

Pros: Benefits of mezzanine

financing

Cons: What to Watch Out For

Lending landscape

Raising Mezzanine Debt:

Best practices

What is Mezzanine Financing

Mezzanine Financing is a

form of debt capital that can

have elements of both debt

and equity and often fills the

gap between senior debt and

equity in a capital structure.

Mezzanine financing is also commonly referred to as:

mezzanine debt, mezz-debt, subordinated debt, sub-debt,

subordinated notes or subordinated debentures.

Example of Mezzanine Financing

Representative Capital Structure

Senior Debt (usually collateralized

by assets like real

estate or A/R)

Mezzanine

Financing

Equity

Most Secure(most likely to be recovered

if something goes wrong)

Least Secure

Least

Expensive

Most

Expensive

When to Use Mezzanine Financing

Acquisition Financing Management BuyoutsRefinancing Existing

Debt

Funding Rapid Growth Partner Buyouts Shareholder Dividends

Majority or Minority

RecapitalizationsFinancial Restructuring Business Expansion

Common Mezzanine Financing Structure

Cash-Paid Interest

Paid-in-Kind (“PIK”)

Interest

Warrants

A monthly or quarterly cash interest payment, based on the outstanding

balances of the mezzanine financing. The interest rate may be fixed or

floating above a base rate such as LIBOR or Prime.

A monthly or quarterly interest payment that accrues to the mezzanine

loan’s principal balance rather than being paid in cash. PIK interest allows

the borrower to use that additional cash to fund growth or other obligations.

Warrants give the mezzanine lender an opportunity to acquire an equity

interest at a predetermined exercise price. They are commonly used to

increase the return to a mezzanine lender by allowing the lender to

participate in the success of a company.

Equity

Co-Investment

It is also common for a mezzanine lender to invest alongside the controlling

shareholder or financial sponsor for some minority equity interest.

What Mezzanine Lenders Look For

• Plenty of cash flow to support the total debt

service payments, tax payments and CapEx

• Consistent or growing cash flow profile

• Strong free cash flow margins: high gross

margins, low CapEx requirements

• Low business cyclicality that might result in

volatile cash flows from year to year

• A strong management team

• An enterprise value of the company well in

excess of the debt level

Mezzanine Lending Landscape(Lower Middle Market to Middle Market)

$1MM

EBITDA

$3MM

EBITDA$5MM

EBITDA

$10MM+

EBITDA

Max Leverage Tolerance

Total Cost

# of Providers

14%+ 11-13%

low high

few many

Market Dynamicsfragmented competitive

Pros v. Cons

Benefits of Mezzanine Financing

Mezzanine Lenders are Focused on Cash Flow, Not Collateral

These lenders usually lend based on a company’s cash flow,

not tangible collateral (assets), so they will often lend in

situations when banks say no due to lack of collateral.

For this reason, mezzanine financing can be a great capital

option for service businesses, which tend to have leaner

balance sheets.

It’s a Cheaper Growth Capital Option or Financing Alternative

than Raising Equity

Equity investors such as private equity firms, family offices or venture capital

firms can certainly provide a much needed slug of capital, but it can come at a

pretty steep price in the form of ownership dilution. Depending on the investor

and situation, it’s likely those providers are trying to achieve 30%+ returns.

Mezzanine financing companies target lower total returns because they’re in a

more secure position than equity investors and are collecting high interest

payments along the way. The cost may still seem high relative to what you’d

expect from a bank, but for a rapidly growing company that is building value

quickly, the interest expense may be well worth it.

Pros v. Cons

Benefits of Mezzanine Financing

Pros v. Cons

Benefits of Mezzanine Financing

It’s Flexible, Non-Amortizing Capital

There are no immediate principal payments- it is usually

interest only capital with a balloon payment due upon

maturity, which allows the borrower to take the cash that

would have gone towards making principal payments and

reinvest it back into the business.

Pros v. Cons

Benefits of Mezzanine Financing

It’s Long-term Capital

Mezzanine financing typically has a maturity of five years

or more, so it’s a long-term financing option that won’t need

to be paid back right after you borrow it – this capital is

usually not used as a bridge loan to fill a short-term

financing need.

Pros v. Cons

Benefits of Mezzanine Financing

Current Owners Maintain Control

It does not require a change in ownership or control – the

existing owners and shareholders remain in the driver’s

seat, a key difference between raising mezzanine financing

and raising equity from a private equity firm.

It is common, however, for a mezzanine lender to have

loan covenants and possibly either participation or

observation rights on the borrower’s board of directors.

Pros v. Cons

What to Watch Out For

More expensive than bank debt

Since junior capital is often unsecured and subordinate to

the senior loans provided by a commercial bank, it’s

inherently a riskier loan for the lender, hence the higher

interest costs.

Pros v. Cons

What to Watch Out For

Warrants or an equity co-investment may be included

For taking greater risks than most secured lenders,

mezzanine lenders will often seek to participate in the

success of those they lend money to by including warrants

or making an equity investment alongside the primary

shareholders, allowing them to increase their return if a

borrower performs very well.

Pros v. Cons

What to Watch Out For

There are still some strings attached

The role of mezzanine lenders is usually passive in terms

of day to day decision making, however, it is common for a

mezzanine lender to require some visibility of the

borrower’s current and future performance.

In addition to financial covenants, they may require either

participation or observation rights on the borrower’s board

of directors.

Raising Mezzanine Financing

Best Practices

1 2 3 4Prepare

Financial information

should be accurate and

complete. Put together a

confidential information

memorandum that

describes the organization

and opportunities, as well

as how the mezzanine

lender’s investment will be

protected and will get paid

back (plus a return).

Run a Process

Terms can vary widely, so

speak with as many

mezzanine lenders as

possible. Running a

coordinated process helps

ensure the borrower is

receiving the most

attractive terms in the

market and helps keep

lenders honest and on

schedule.

Focus on Cost,

Flexibility and Fit

Cost of capital matters,

but it isn’t everything.

Sometimes a lender who

truly understands and

appreciates your business

can take you further than

the lowest cost provider,

particularly when things

don’t go as planned.

Bring in Help

When Needed

Create a strong deal

team. Despite the costs,

involving a good attorney,

accountant and

investment banker can

streamline a capital

raising process, help

negotiate a better deal

and ensure that really

expensive mistakes don’t

get made.

About Us

Access Capital Partners is an investment bank that

helps entrepreneurs and financial sponsors raise

debt and equity capital for privately held, middle

market businesses in all types of situations.

STRATEGY | CAPITAL RAISING | EXIT ADVISORY

$8.0B+ 100+ 35+ 1000+In total transaction

experience

Completed transactions Years of middle

market experience

Relationships with

capital providers and

strategic buyers across

the globe

Members of Access Capital are registered representatives of and conduct securities transactions through StillPoint Capital, LLC, Member FINRA/SIPC,13051 W. Linebaugh Ave., Ste. 1, Tampa FL. StillPoint Capital is not affiliated with Access Capital.

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