Posted on: October 29th, 2020

Taking the Big Leap with Mezzanine Debt Mezzanine debt is a powerful source of growth financing, that funds major events in the development of a company. An acquisition, a new product, a new growth path are all appropriate uses for mezzanine debt. While lines of credit and bank term loans can fund small steps, mezzanine debt is there to fund your big leap forward.

Rapid scale ups can only be achieved with strong capital underpinning, where lenders and investors fund into the future growth of the company. Rapid scale-ups involve substantial upfront investment in long term growth strategies with lucrative yet uncertain long-term return potential.

The inherent risk of these investments requires a funding partner well positioned to assume such risks who can provide extra stabilization should the project encounter problems. The bigger the leap, the greater the risk the more important it is to fund with a mezzanine debt lender. They understand growth like an equity investor and can flex the terms of their loan to accommodate your investment schedule and repayment preferences.

Growth Strategies Funded by Mezzanine Debt

Mezzanine debt pricing is generally 12% with 1.5% in upfront fees. If the rate of return of your strategic growth exceeds this cost, it is a great idea to include mezzanine debt in your funding plans. Often companies use this form of debt over a critical stretch of transitional growth, usually the first two to three years. Once the big leap has been successfully achieved, the company is larger, more profitable, and able to repay or refinance the mezzanine debt with lower priced, conventional bank debt.

Here are the top 4 big leap growth strategies funded by mezzanine debt:

Acquisitions – mezzanine debt is a great source of acquisition financing for an established company to acquire a target company. These acquisitions usually provider greater customer and product diversification for the acquirer.
Rollups – mezzanine debt can play the role of an equity provider in a rollup where a large amount of capital is scheduled to be deployed over a short time frame.
Growth Financing – mezzanine debt can be used to invest in any type of organic growth including capacity expansion, product enhancement or staffing additions.
Independent Sponsor buyouts – Strong independent sponsors can attract mezzanine debt to finance their acquisitions. This gives the sponsor a lower cost, equity investor substitute that is both flexible and scalable.

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.