Mezzanine debt, a.k.a. subordinated debt or junior capital, occupies a position in the middle level of the capital structure – that is between the senior debt (i.e. a loan from a bank) at the top and the common equity (i.e. the owner’s capital invested) at the bottom. In practice, mezzanine debt is designed to fill the financing “gap” between the amount the senior lender will provide and the amount of equity capital the business owner, investors, etc. are able and/or willing to commit. This financing gap is often called the “air-ball” or “blue sky” in a deal. Mezzanine debt almost always includes “equity participation” via warrants, success fees, or options, which aligns the interests of the mezzanine investor with those of the business owner. In essence, mezzanine debt is the “temporary capital” needed to complete a transaction.
Mezzanine debt is attractive for several reasons: (1) flexibility with regard to structure and terms, (2) clearly a cheaper alternative than additional equity capital (i.e. more partners), (3) correctly positions the balance sheet for growth, (4) does not require any type of management control or voting position, and (5) often only requires interest payments for relatively long periods, which allows management to invest free cash flow into growth initiatives for the business.
Generally speaking, a company with strong, proven operating management at key levels with a proprietary product or service and a strong market position is a good candidate for mezzanine financing. These companies often have predictable cash flows or strong growth potential and have demonstrated the ability to earn solid profit margins. More specifically, F.N.B. Capital looks for companies with strong management, revenues in excess of $10 million, and EBITDA (i.e. cash flow or operating profit) greater than $2,000,000.
Most of the time, mezzanine financing is used to help complete management buyouts and partnership buyouts and also for companies completing strategic acquisitions (i.e. purchasing competitors, suppliers, etc.). Additionally, mezzanine financing is used in situations where the revenue growth of an established business outpaces the rate at which the senior banker is willing to increase the amount of available credit. In these situations, a mezzanine investor can provide the business with permanent working capital that does not “tie up” the collateral base required for senior bank loans. Lastly, mezzanine financing can help highly successful business owners diversify their risk by making a special dividend.
Unlike senior bank loans, a predetermined “product suite” for mezzanine investing does not exist. Each investment is tailored to the specific needs of the individual client. Generally speaking, most mezzanine investments are unsecured, involve a term of 2 – 7 years, a current interest rate of 12% – 14% (no amortization), and some form of an equity kicker (i.e. warrants, success fees, etc.). FNBCC prefers to invest a minimum of $1 million in any single transaction and will entertain opportunities to invest as much as $7 million.
Yes. We will take minority equity positions (i.e. ownership of < 50%) in companies upon the attainment of full merchant banking powers. In taking minority positions, we will require certain corporate governance controls such as representation on the Board of Directors. The terms on these investments are negotiated on a deal by deal basis.
F.N.B. Capital is not a venture capital firm. Venture capital involves investing in early stage companies that do not have a long operating history (if any). It is considered a subset of private equity focused on investments in new and emerging companies. Venture capital candidates have little to no revenues, but tremendous growth opportunities. As such, these types of investments involve a much higher level of risk.
No. The best person to handle the day-to-day operations of a business we invest in is the business owner, plain and simple. F.N.B. Capital may take certain governance and oversight positions, depending on the nature of the investment. With mezzanine debt investments, this typically entails non-voting board observation rights. With private equity investments, the level of governance depends upon the amount of ownership F.N.B. Capital takes.
Absolutely! Our current clients have expressed a willingness to talk with prospective clients and have provided testimonials, which we have posted on our website.