Mezzanine investments are often used as a later stage capital injection for companies to achieve a wide array of objectives. The reasons behind a mezzanine investment can range from allowing established companies to execute a specific mission to implement expansion plans to facilitating a new firm in establishing their initial public offering. Mezzanine investing is unique primarily due to its loan/equity hybrid attribute.
Function
Typically mezzanine funding involves some sort of convertible instrument much like a call option providing the investor the capability to transform the loan into an equity position at an agreed upon price if the loan is not entirely paid back in the specified time frame. The mezzanine method of raising capital is a type of bridge financing between the original bank financing and the equity participation of the company's principals.
Benefits
One of the big positives for companies obtaining capital from mezzanine funding is that it is viewed like equity on the balance sheet allowing for it to be much easier in attracting regular bank financing. Mezzanine below bank financing but ranks above any venture capital financing that is in place. Another reason why so many companies seek out mezzanine investing is because of the large amounts of capital that can be raised.
Considerations
For instance, a company can typically generate more than four times cash flow using the approach. This characteristic alone renders it a popular way to raise funds for small and large firms alike. Even though there is usually an equity component to a mezzanine investment deal, it is significantly less equity control than is typically given to private equity or venture capital, which is certainly an attractive element among new entrepreneurial type companies.
Significance
It is important to note that with mezzanine investing, because it uses debt vehicles in addition to the equity component, the investor receives income from the interest payment. On the other hand, when it comes to private equity investors they are only reimbursed after the investments are sold and do not receive any income during the interim.
Potential
Mezzanine investing is usually short term in nature and is used as a stopgap measure to get to its longer-term standard bank financing. As its popularity continues to grow, however, there are a variety of time frames and uses available based on the particular project involved.
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