- Blog, Cash Flow Financing, Equity Value, Growth Capital, Leveraged Buyout, Leveraged Loan, Management Buyout, Mezzanine Capital, Mezzanine Debt, Mezzanine Investors, Recapitalization, Regional Capital
- May 12, 2015
The interests of mezzanine capital investors are aligned with the Company, which motivates them to be patient and supportive partners. Mezzanine investors are incented to work with the management team and the Company to put the capital and pieces in place to achieve success.
Here are two key points that illustrate this behavior:
(1) Mezzanine capital investors usually have limited to no collateral coverage. Accordingly, during times of financial distress, they are more focused on getting the company “back on track” versus preserving or liquidating assets and collateral. Mezzanine capital investors are focused on the healthy long-term prospects of a company and ensuring it continues as a going concern so they are positioned to someday be repaid via a recapitalization or a sale.
(2) Mezzanine capital investors often co-invest equity (or an equity kicker, such as a warrant) alongside their mezzanine debt. These are typically minority positions in the capital structure. Although dilutive to the majority equity holder of a business, the benefits of this arrangement outweigh the costs. The potential upside provides a mezzanine capital investor the incentive to help the business grow and create equity value, which ultimately will be rewarding for all equity holders. Hence shared interests are more fully aligned.
In conclusion, these aligned interests focuses the mezzanine capital investor on creating long term equity value which promotes an environment where the investor is more supportive of a company’s strategic growth initiatives. Further, these dynamics dissuade the investor from prematurely demanding payment in full in the event the Company has a brief period of financial distress, i.e. declining revenue, profitability, etc. Accordingly, the mezzanine debt investor is not only a capital provider, but they also serve as a trusted advisor – providing advice and consulting when requested to help create long term value and success for the Company.