The Beauty of Delayed Draw Mezzanine Debt Facilities

Posted on: June 10th, 2022

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With the private debt industry flush with freshly raised capital, and assets under management at all-time highs, the industry challenge is how to invest all this capital. Many private mezzanine debt funds have middle market mandates which involves check sizes from a low of $10 million to a high of $75 million. Given their goal to invest at the midpoint of that range, many funds are increasingly opting to provide delayed draw facilities to their new borrowers for additional acquisitions or growth investment, within the first several years of the initial closing.

Delayed Draw Mezzanine Debt Facilities

Delayed draw mezzanine debt facilities can come in the form of a committed line or a discretionary accordion and are customized to the specifics of each deal. If a company has an identified need for more acquisition capital to fund their roll-up strategy, then a fully committed delayed draw facility is the best approach. If a company has a more nebulous need for growth investment and wants to ensure future capital access, then an accordion is the best approach. Whether a delayed draw facility or a discretionary accordion, the key is you have embedded in your business model a mezzanine debt capital partner to fund your future growth needs. For many companies that subsist in a hand-to-mouth fashion, this is a tremendous gamechanger and enables long term value-creating investment.

Mezzanine debt is a highly transformative form of capital that allows for high intensity, transitional growth. Fusing mezzanine debt functionality to structural scalability creates an even higher form of corporate finance power for a middle market company. The key in crafting this form of structure is to demonstrate a clear need for follow-on capital in your growth projection. The mezzanine debt lender must clearly grasp the capital building intention through their review of the confidential information memorandum. They need to see you as a trusted steward of acquisition capital with a disciplined plan to achieve accretive value.

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.