Mezzanine Financing: A Hybrid Debt Solution

Mezzanine financing provides companies with the ability to raise funds for specific projects or for the selective acquisition by offering a form of debt and equity financing. Beyond this, mezzanine financing is also embedded in mezzanine funds. The latter represent a sort of pooled investment, again like a mutual fund, granting financing under the guise of mezzanine financing with significantly qualified businesses. This form of financing can provide greater returns to investors than corporate debt, which may pay as much as 12% to 30% per annum. Mezzanine loans are most commonly utilized in the growth expansion of existing businesses and not as start-up or early-stage capital. Both mezzanine financing and preferred equity can be taken out and retired with lower-interest financing if the market interest rate declines significantly.

How it works:
Mezzanine financing fills the gap between debt financing and equity financing and is considered one of the highest risk forms of debt. It ranks higher than pure equity but lower than pure debt. But this also means that it can offer some of the highest returns to investors in debt, since it often enjoys rates from 12% to 20% a year, and sometimes as high as 30%. Mezzanine finance is also considered very expensive debt or cheaper equity, as it carries a higher interest rate than the senior debt that companies would otherwise obtain through their banks but is substantially less expensive than equity in terms of the overall cost of capital. It also impacts the company's share value less than equity does. Ultimately, mezzanine financing lets a business own more capital and thus increase its returns on equity.

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