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.

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.