The Leadership Imperative for Mezzanine Debt Lenders

Posted on: June 18th, 2022

mezzanine debt

Mezzanine debt lenders provide funding for scale-up scenarios where growth rate acceleration can be realized. These scale ups include acquisition driven strategies as well as new product or new market development. Scaling companies are not interested in single digit revenue growth but step change growth which transforms not only the size but also the diversification of the enterprise. This transformative growth is a historic step and requires topflight C-level management talent for leadership.

Mezzanine debt lenders have experience funding scale-up transactions and are keenly focused on the quality and depth of the team. Mezzanine debt lenders focus on the level of integration risk of the scale-up which relates to management’s ability to integrate the acquired operation into the existing business. On paper, business integration is a straightforward exercise with similar workflows at a higher level of volume.

Mezzanine Debt Lenders in Business Integration

In reality, business integration unfolds in a mercurial fashion, with many unknown issues undermining forward progress. Going into the acquisition integration, there is a known scope of key areas to address. Often unknown issues, such as non-standard business practices within the current workflows, make the operational assimilation longer and more resource intensive. Mezzanine debt lenders are a key stakeholder in the integration outcome as their loan repayment relies on the Company significantly scaling its cash flow.

Without higher cash flow materializing in year 3 or 4, the mezzanine debt repayment outlook is dim at the end of 5 years. Given the importance of this factor to cash flow and valuation formation, it is critical to ensure you have veteran and highly skilled leadership at the helm of your scale up. Experience is a great teacher in corporate growth, as often the best laid plans often go astray, and quick pivoting is the best way forward. Mezzanine debt lenders will assess your management team in light of their historical accomplishments. Ultimately, they will choose to lend to companies with skilled and senior leadership who can not only integrate efficiently but also create systems and processes to support higher levels of corporate growth.

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.