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.

In the acquisition financing arena, capital availability is destiny as companies require reliable access to capital to grow over the long term. Unforeseen capital needs usually arise when acquirers least expect it. This can cause some concern for the acquisition financing provider, especially when covenants tighten up and that working capital availability is utilized faster than expected.

Mezzanine debt borrowing is usually a straightforward activity that many companies use for funding of transitional growth. Mezzanine debt lenders are highly transparent about their due diligence approach and their post-closing loan management making it easy for companies to engage with.

Elections have consequences and positive ones at that for the acquisition financing middle market. While much media attention is paid to the direction of the yield curve and the Fed’s likely rate cuts, scant attention is paid to the more important drivers of the acquisition financing market – business psychology and regulatory climate.

Harmonic Growth and Mezzanine Debt