Posted on: October 13th, 2023

mezzanine-debt

Most middle market growth plans are based on the operator being all knowing and all controlling with respect to driving the growth plan. The plan is presented to the mezzanine debt lender who evaluates its achievability enroute to deciding to fund the deal. Companies often see the mezzanine debt lender as a utilitarian provider of funding with little else to bring to the table. Yet, throughout the history of mezzanine debt lenders from the 1990’s through today, there are many instances of them providing far more than just capital, thereby unlocking a cycle of harmonic growth.

In this scenario, the Company leverages the knowledge of the lender as a sort of super consultant, to grow in a faster yet more sustainable and reliable way. The mezzanine debt lender has tremendous experience with business building and growth. They have insights and are specialists in every aspect of business performance. As lenders, they cannot impose this on a mezzanine debt borrower but rather try to soft sell their advice and contacts to their borrowers in a constructive, hands-off fashion. Smart borrowers realize the inherent wisdom of their mezzanine debt lenders due to their experience and exposure to hundreds of companies with similar acquisition profiles.

When the borrower considers the growth advice offered by the lender, a level of harmonization occurs that increases the likelihood of growth success. Armed with insights and actions to manage the growth, the company is more likely to have a comprehensive and durable growth plan. A mezzanine debt influenced by growth plan will bring more capital and resources to the point of attack thereby de-risking acquisition integration. The relationship between the two parties is also stronger to the extent the borrower heeds the lessons of the mezzanine debt lender. The strength of the relationship allows the Company significant operating and capital flexibility, even if the business underperforms. Moreover, the stronger the harmony between borrower and lender, the more likely that decisions will be made from a position of strength with a view toward maximizing the growth potential of the business.

As the Fed decides to ease interest rates, middle market acquisition financing structures will benefit in a number of ways. The underlying values of middle market companies will increase leading to a higher enterprise value and lower loan to value ratios for existing portfolio companies of acquisition financing lenders.

The role of acquisition financing is infrequently elevated above a functional transactional one. When a business needs financing to acquire, they go to the market and source acquisition financing to supplement their equity investment to close the deal. Despite existing in many different forms, acquisition financing is rarely explained in terms of the value it brings to the acquirer.

Acquisition financing underwriting usually focuses on business and financial issues that underpin the stability of cash flow. Providers of acquisition financing usually validate the durability of a company’s competitive advantage and the depth of its resource base. Environmental issues are usually not a major part of the analysis in today’s service and technology-based economy.

Harmonic Growth and Mezzanine Debt