Mezzanine finance

Q: Have you also considered?

Private debt – Private debt is an umbrella term that refers to debt products that are financed by non-bank institutions. Unlike publicly listed corporate bonds, private debt products are usually illiquid and not issued or traded on public markets. Private debt (also known as private credit) Direct lending – Direct lending is a type of private debt financing, i.e., it refers to debt investments that come from institutions other than banks. Lenders (usually asset management companies) combine their capital together into a professionally managed fund, which provides debt products to businesses. Unlike publicly listed corporate bonds, private debt products are usually illiquid and not regularly traded on public markets. Special situations – ‘Special situations’ fund are unusual or one-off events (including rumours and news stories) that mean the market is less able to value a business properly. These events include spin-offs, mergers, bankruptcy, litigation, succession, or shareholder action. Special situations funds are equity funds that look to exploit these events by buying equity in these businesses.

Quick facts

Amount

Typically between R100,000 and R100m

Term

Varies

Cost

Monthly interest varies, plus facility fee and an exit fee – if you can't pay back the loan it's converted into a share in your business (i.e. equity) which the lender takes

Speed

3–6 months

Purpose of finance

Growth

Suitable for

Established businesses (with assets and a trading history) looking to raise working capital for business growth, infrastructure, real estate development or a buy-out

What is mezzanine finance?

Mezzanine finance is a hybrid of debt and equity financing that can be useful for large projects, buyouts, or expansion. It is a fairly complex form of business loan that gives the lender the right to a share of equity in your business if you default on your loan. Mezzanine finance comes under the umbrella of private debt.

Mezzanine finance sits in the middle between debt and equity finance (‘mezzano’ is Latin for ‘middle’). You might use it as a third option alongside business loans and equity finance if you’re thinking about an acquisition, buyout, or expansion. You can also see it as a form of top-up finance if you can’t borrow as much as you need but don’t want to give away equity at the outset.

Why choose mezzanine finance?

Mezzanine finance is effectively a business loan with a twist. Arrangements can differ, but in most cases, if you can’t pay back the debt within a pre-agreed timeframe, then the debt becomes equity. In other words, the lender gets a share of equity in your business if you default on your loan – you’re using equity as your security.

Mezzanine finance is often subordinated to bank debt. This is the most common form, also known as a subordinated loan. This is subordinated in priority of repayment to senior debt, but senior in comparison to common stock or equity.

This type of financing is more suitable for existing businesses with at least two years of successful trading history. Startups with low revenue may struggle to obtain this type of financing.

Pros and cons of mezzanine finance?

Accessible to those with poor credit and no assets to secure the loan
Retain equity of your business (upon return of loan and as per contract terms)
Greater flexibility, choose up-front whether you want your loan to be equity bearing or not. Can’t choose between debt and equity? Why choose?!
Excellent for management buy-out or prepare for exit scenarios

! You will lose equity if you stipulated that as event of non-repayment
! You may find the cost of finance to be more expensive than a straightforward arrangement (non-hybrid)
! Lenders will want to see strong growth projections and profitability

Have you also considered?

Private debt – Private debt is an umbrella term that refers to debt products that are financed by non-bank institutions. Unlike publicly listed corporate bonds, private debt products are usually illiquid and not issued or traded on public markets. Private debt (also known as private credit)

Direct lending – Direct lending is a type of private debt financing, i.e., it refers to debt investments that come from institutions other than banks. Lenders (usually asset management companies) combine their capital together into a professionally managed fund, which provides debt products to businesses. Unlike publicly listed corporate bonds, private debt products are usually illiquid and not regularly traded on public markets.

Special situations – ‘Special situations’ fund are unusual or one-off events (including rumours and news stories) that mean the market is less able to value a business properly. These events include spin-offs, mergers, bankruptcy, litigation, succession, or shareholder action. Special situations funds are equity funds that look to exploit these events by buying equity in these businesses.