Mezzanine financing is a special form of capital procurement for companies that lies between equity and debt capital. It is particularly useful for companies that need additional capital without further diluting their ownership interests or providing additional collateral for conventional loans. Typically, mezzanine financing is provided through the issuance of subordinated loans or convertible bonds, which offer higher interest rates than normal loans. In the event of a financial default, mezzanine creditors stand behind senior creditors but ahead of equity investors. This makes mezzanine capital riskier, but also potentially more lucrative for investors.
The term “mezzanine” originally comes from architecture and refers to a mezzanine floor located between the first floor and the second floor of a building. It is derived from the Italian word “mezzano”, which means “middle”.
Applied to the world of finance, the term “mezzanine” describes a form of financing that falls between equity and debt. Similar to the architectural mezzanine floor, which represents a connection between two levels, mezzanine financing combines elements of both equity and debt capital and thus offers a hybrid financing structure.
Mezzanine capital is a hybrid form of financing that combines the characteristics of both equity and debt capital. It is often used by companies that need additional funding but do not want to give up shares in their company or provide additional collateral for conventional loans.
Characteristics of mezzanine capital:
Overall, mezzanine capital offers companies a flexible way to close their financing gap without losing control of the company or diluting equity.
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Mezzanine capital can come in various forms, depending on the specific needs of a company and the terms of the financing agreement. Here are some examples of mezzanine capital:
| Form of Mezzanine Capital | Description |
|---|---|
| Subordinated loan | A loan that ranks behind senior debt capital. In the event of insolvency, the claims are serviced after those of the senior creditors. |
| Convertible bonds | Bonds that the holder can convert into shares in the company. This combination offers interest like a loan and the possibility of equity participation. |
| Silent partnership | An equity participation in which the investor has no say in the company. The investor shares in the profits but remains anonymous and has no liability. |
| Profit-linked loan | A loan where the repayment is linked to the company's profit in addition to fixed interest. This allows for more flexible repayment terms. |
| Participating loan | A loan in which the investor receives a share of the company's turnover or profit in addition to a fixed interest rate. Often used in higher-risk projects. |
| Warrant bonds | Bonds that give the holder the right to acquire additional shares in the company at a fixed price. They combine elements of debt and equity. |
| Subordinated profit participation rights | A hybrid form of financing that offers the investor performance-related remuneration and a share in the value of the company, but without granting voting rights. |
| Convertible preferred equity | A preference share that can be converted into ordinary shares. It offers fixed dividends and priority in distribution over ordinary shareholders. |
Mezzanine capital is often used in situations where companies want to raise capital flexibly without putting too much strain on their equity structure or losing control of the company. These forms of mezzanine capital offer companies and investors different combinations of risk, return and leverage, allowing them to be flexibly tailored to the respective financing needs.
Mezzanine financing has some characteristic features, in addition to those already mentioned in mezzanine capital, which distinguish it from other forms of financing. The typical features are summarized below:
These features make mezzanine financing a flexible and attractive option for companies that need additional funding for expansion, acquisitions or restructuring.
This table provides a clear overview of typical situations in which mezzanine capital is used and the specific role that this form of financing plays in each case. These examples illustrate how versatile mezzanine financing can be used to overcome various financial challenges in different industries.
| Use case | Situation | Use of mezzanine capital |
|---|---|---|
| Company takeover (MBO/MBI) | Management team plans to take over the company or external managers want to acquire a company. | Closes financing gap without increasing equity and enables takeover without relinquishing control. |
| Expansion of a medium-sized company | Medium-sized company wants to expand into new markets or increase production capacity. | Financing of expansion without dilution of equity, flexible repayment from future income. |
| Restructuring of a company | Company needs financial restructuring to improve its capital structure. | Enables reduction of senior debt without equity dilution and supports operational reorganization. |
| Real estate project development | Real estate developer plans new construction project but has limited equity and can only obtain part of the financing through bank loans. | Closes financing gap for the project, repayment is made from sales proceeds or rental income after completion. |
| Company growth through acquisition | Company wants to grow rapidly by acquiring a competitor or company in a related sector. | Financing the acquisition without tying up too much equity, synergy effects justify higher interest charges. |
| Capital for research and development (R&D) | Innovative technology company needs funds to develop and launch a new product. | Financing of R&D costs without raising equity at an early stage, repayment from future sales. |
The amount of mezzanine financing can vary widely and depends on several factors, including the size of the company, specific financing needs, industry, risk profile and the availability of other sources of financing. However, typical financing sizes for mezzanine financing are in the following ranges:
Mezzanine financing typically ranges from **1 million to over 200 million euros**, depending on the specific requirements and size of the company. They offer a flexible financing solution for a wide range of capital requirements, especially in situations where traditional financing alone is not sufficient.
Important terms relating
to Mezzanine
| Term | Description |
|---|---|
| Mezzanine capital | A hybrid form of financing that combines elements of equity and debt capital. |
| Subordinated loans | Loans that rank behind senior debt and are serviced after the latter in the event of insolvency. |
| Convertible bond | A bond that the holder can convert into shares in the company, combining debt capital with equity. |
| Silent partnership | A form of participation in which the investor has no influence on the company but participates in the profits. |
| Profit-participating loan | A loan in which the investor receives a fixed interest rate as well as a share in sales or profits. |
| Bond with warrants | A bond with the right to acquire shares in the company at a later date at a fixed price. |
| Profit participation rights | Securities that grant the holder a share in the profit and/or loss of the company, often without voting rights. |
| Convertible Preferred Equity | Preferred stock that can be converted into common stock and has priority in dividend payments. |
| Bullet Repayment | A repayment structure in which the entire principal amount is repaid in one lump sum at the end of the term. |
| Hybrid capital | A form of financing that includes both equity and debt elements, as is the case with mezzanine capital. |
| Profit-linked loan | A loan where the repayment is linked to the company's profit in addition to fixed interest. |
| Exit participation | An agreement in which the mezzanine capital provider receives a share of the company value in the event of a sale. |
| Capital structure | The composition of a company's capital, including equity and debt. |
| Leverage | The use of debt capital to finance corporate activities in order to increase the return on equity. |
| Interest coverage ratio | A measure of a company's ability to pay its interest obligations from its operating profit. |
This table provides an overview of important terms related to mezzanine capital and its application.
Mezzanine financing is particularly suitable in certain situations and for specific target groups that require flexible but risk-conscious capital procurement. Here are some scenarios and target groups for which mezzanine financing is particularly suitable:
Mezzanine financing is particularly suitable for companies that want to raise capital flexibly without putting too much strain on their equity structure or giving up their control over the company.
The following diagram provides an overview of the situations in which mezzanine financing is suitable.
The following section explains in more detail the situations in which mezzanine financing is suitable and highlights the advantages.
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Back to the Financial DictionaryThis table provides a clear overview of the main advantages and disadvantages of mezzanine capital to help companies decide whether this form of financing is suitable for them.
| Advantages of Mezzanine Capital | Disadvantages of Mezzanine Capital |
|---|---|
| No dilution of equity: Companies can raise capital without giving up shares | Higher costs: Mezzanine capital is more expensive than senior debt due to the higher risk. |
| Flexibility: Mezzanine capital can be structured flexibly to meet the specific needs of the company. | Subordination: In the event of insolvency, mezzanine investors are only paid after the senior creditors. |
| No say: Investors generally have no voting rights in the company. | Complexity: The structuring and negotiation of mezzanine financing can be complex and time-consuming. |
| Improved balance sheet structure: Mezzanine capital can improve the equity ratio and strengthen the balance sheet. | Interest and profit sharing obligations: The obligation to pay interest and/or profit sharing can put a strain on the company's liquidity. |
| Access to additional capital: Companies can close financing gaps that are not covered by traditional financing. | Higher risk for the company: In the event of payment problems, mezzanine capital can increase the risk of financial difficulties. |
| Long-term financing: Mezzanine capital is often provided with longer terms, which increases planning security. | Potential negative impact on credit rating: Raising mezzanine capital can have a negative impact on the company's credit rating as it is considered debt capital. |
What exactly is a balance sheet in this context?
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To the article on Balance SheetCompanies can obtain mezzanine capital from a variety of sources, depending on their specific needs, industry and financing strategy. Here are the main sources of mezzanine capital:
Companies can obtain mezzanine capital from a variety of sources, including specialized mezzanine funds, private equity firms, investment banks, insurance companies, pension funds, family offices, crowdfunding platforms, commercial banks and even in-house sources. Choosing the right source depends on the size of the company, its financing needs and specific objectives.
What exactly is Private Equity in this context?
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To the Private Equity articleMezzanine capital is generally more expensive than conventional debt capital, as it involves a higher risk for the investors. The costs are made up of higher interest rates, profit sharing, or a combination of both elements. Typically, the total return for the investor is between 10 % and 20 %, depending on the risk of the company and the specific contractual terms.
Mezzanine financing is useful if you need additional capital without diluting your equity ratio or being able to provide collateral for traditional loans. It is particularly useful for expansion projects, takeovers or restructuring your company's finances if you are looking for flexibility and long-term financing.
Mezzanine capital offers you the opportunity to raise additional capital without losing your control over the company or diluting your equity, while allowing you to take advantage of flexible financing terms tailored to your needs.
Mezzanine capital providers are usually specialized funds, private equity companies, investment banks, insurance companies, pension funds and sometimes also family offices or crowdfunding platforms.
Mezzanine funds are investment funds that specialize in providing mezzanine capital to companies, often with a combination of debt and equity characteristics, in order to achieve higher returns with moderate risk.
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