Managers of middle market companies frequently identify promising opportunities to materially grow their businesses internally or through acquisitions. Often, however, a company’s senior lender may be unable to provide sufficient debt capital to undertake growth opportunities or complete such an acquisition.
Mezzanine capital can play a valuable role in these situations. Key benefits of using mezzanine debt to fund growth projects or finance acquisitions include the following:
- Mezzanine allows management teams and other existing owners to secure debt beyond the amount available through senior sources to complete acquisitions.
- Unlike many senior lenders, mezzanine lenders typically do not rely on asset values to determine the amount of capital they will provide. Additionally, they do not require security or liens on assets, relying instead on the company’s cash flow to support repayment over time.
- Financing growth or an acquisition with mezzanine debt is less dilutive to existing owners than is a financing using equity. As such, managers and existing shareholders can maintain more control of the business post-transaction as a result of the larger ownership retained.
- Mezzanine is typically non-amortizing debt, reducing demands on cash flow and providing management teams with increased flexibility to operate their businesses.
- Interest payments on subordinated debt are tax deductible reducing the acquired company’s tax burden going forward.