Mezzanine financing is a hybrid form of capital combining debt and equity features. It sits between senior debt and equity in a company’s capital structure. Companies gain flexible funding, while investors receive higher returns in exchange for increased risk.
How mezzanine financing works
Mezzanine financing is structured as subordinated debt. It ranks below senior lenders but ahead of equity holders. Investors receive interest payments and equity participation through warrants or conversion rights.
Returns are higher than senior debt to compensate for risk. Companies benefit from reduced dilution compared with a pure equity raise.
Mezzanine financing in practice
Mezzanine financing helps companies raise capital after senior debt capacity is reached.
In real estate, it can bridge the gap between a property's loan-to-value ratio and required equity. For small businesses, it offers an alternative to giving up significant ownership stakes.
The flexible structure makes it attractive for private equity transactions. Sponsors can maximise leverage whilst maintaining control.
