As a business owner or financial sponsor, mezzanine financing can come in handy when there's a capital gap between what a senior lender will provide and the total capital need. Whether it's being used for a management buyout, to fund rapid growth, or pay the shareholders a healthy dividend, mezzanine financing is a growth capital option that's become increasingly prevalent in middle market and lower middle market companies. As non-bank financing alternatives for small to medium size companies get more sophisticated and more prevalent, understanding how and when to use mezzanine financing will serve you well as you grow your business and ultimately realize the value you've created. The Growth Capital Guide: Leveraging Mezzanine Financing for Growth will cover: ​ - What Mezzanine Debt is - An Example of Mezzanine Financing - When to Use it - Common Structures - What Mezzanine Lenders Look For - Pros: Benefits of Mezzanine Financing - Cons: What to Watch Out For - The Mezzanine Financing Landscape - Raising Mezzanine Debt: Best Practices

1. The
Growth Capital
Guide
Leveraging
Mezzanine Financing
For Growth

2. Mezzanine Financing
Overview
What is it?
Example of Mezzanine
Financing
When to use it?
Common structures
What lenders look for
Pros: Benefits of mezzanine
financing
Cons: What to Watch Out For
Lending landscape
Raising Mezzanine Debt:
Best practices

3. What is Mezzanine Financing
Mezzanine Financing is a
form of debt capital that can
have elements of both debt
and equity and often fills the
gap between senior debt and
equity in a capital structure.
Mezzanine financing is also commonly referred to as:
mezzanine debt, mezz-debt, subordinated debt, sub-debt,
subordinated notes or subordinated debentures.

4. Example of Mezzanine Financing
Representative Capital Structure
Senior Debt
(usually collateralized
by assets like real
estate or A/R)
Mezzanine
Financing
Equity
Most Secure
(most likely to be recovered
if something goes wrong)
Least Secure
Least
Expensive
Most
Expensive

5. When to Use Mezzanine Financing
Acquisition Financing Management Buyouts
Refinancing Existing
Debt
Funding Rapid Growth Partner Buyouts Shareholder Dividends
Majority or Minority
Recapitalizations
Financial Restructuring Business Expansion

6. Common Mezzanine Financing Structure
Cash-Paid Interest
Paid-in-Kind (“PIK”)
Interest
Warrants
A monthly or quarterly cash interest payment, based on the outstanding
balances of the mezzanine financing. The interest rate may be fixed or
floating above a base rate such as LIBOR or Prime.
A monthly or quarterly interest payment that accrues to the mezzanine
loan’s principal balance rather than being paid in cash. PIK interest allows
the borrower to use that additional cash to fund growth or other obligations.
Warrants give the mezzanine lender an opportunity to acquire an equity
interest at a predetermined exercise price. They are commonly used to
increase the return to a mezzanine lender by allowing the lender to
participate in the success of a company.
Equity
Co-Investment
It is also common for a mezzanine lender to invest alongside the controlling
shareholder or financial sponsor for some minority equity interest.

7. What Mezzanine Lenders Look For
• Plenty of cash flow to support the total debt
service payments, tax payments and CapEx
• Consistent or growing cash flow profile
• Strong free cash flow margins: high gross
margins, low CapEx requirements
• Low business cyclicality that might result in
volatile cash flows from year to year
• A strong management team
• An enterprise value of the company well in
excess of the debt level

8. Mezzanine Lending Landscape
(Lower Middle Market to Middle Market)
$1MM
EBITDA
$3MM
EBITDA
$5MM
EBITDA
$10MM+
EBITDA
Max Leverage Tolerance
Total Cost
# of Providers
14%+ 11-13%
low high
few many
Market Dynamicsfragmented competitive

9. Pros v. Cons
Benefits of Mezzanine Financing
Mezzanine Lenders are Focused on Cash Flow, Not Collateral
These lenders usually lend based on a company’s cash flow,
not tangible collateral (assets), so they will often lend in
situations when banks say no due to lack of collateral.
For this reason, mezzanine financing can be a great capital
option for service businesses, which tend to have leaner
balance sheets.

10. It’s a Cheaper Growth Capital Option or Financing Alternative
than Raising Equity
Equity investors such as private equity firms, family offices or venture capital
firms can certainly provide a much needed slug of capital, but it can come at a
pretty steep price in the form of ownership dilution. Depending on the investor
and situation, it’s likely those providers are trying to achieve 30%+ returns.
Mezzanine financing companies target lower total returns because they’re in a
more secure position than equity investors and are collecting high interest
payments along the way. The cost may still seem high relative to what you’d
expect from a bank, but for a rapidly growing company that is building value
quickly, the interest expense may be well worth it.
Pros v. Cons
Benefits of Mezzanine Financing

11. Pros v. Cons
Benefits of Mezzanine Financing
It’s Flexible, Non-Amortizing Capital
There are no immediate principal payments- it is usually
interest only capital with a balloon payment due upon
maturity, which allows the borrower to take the cash that
would have gone towards making principal payments and
reinvest it back into the business.

12. Pros v. Cons
Benefits of Mezzanine Financing
It’s Long-term Capital
Mezzanine financing typically has a maturity of five years
or more, so it’s a long-term financing option that won’t need
to be paid back right after you borrow it – this capital is
usually not used as a bridge loan to fill a short-term
financing need.

13. Pros v. Cons
Benefits of Mezzanine Financing
Current Owners Maintain Control
It does not require a change in ownership or control – the
existing owners and shareholders remain in the driver’s
seat, a key difference between raising mezzanine financing
and raising equity from a private equity firm.
It is common, however, for a mezzanine lender to have
loan covenants and possibly either participation or
observation rights on the borrower’s board of directors.

14. Pros v. Cons
What to Watch Out For
More expensive than bank debt
Since junior capital is often unsecured and subordinate to
the senior loans provided by a commercial bank, it’s
inherently a riskier loan for the lender, hence the higher
interest costs.

15. Pros v. Cons
What to Watch Out For
Warrants or an equity co-investment may be included
For taking greater risks than most secured lenders,
mezzanine lenders will often seek to participate in the
success of those they lend money to by including warrants
or making an equity investment alongside the primary
shareholders, allowing them to increase their return if a
borrower performs very well.

16. Pros v. Cons
What to Watch Out For
There are still some strings attached
The role of mezzanine lenders is usually passive in terms
of day to day decision making, however, it is common for a
mezzanine lender to require some visibility of the
borrower’s current and future performance.
In addition to financial covenants, they may require either
participation or observation rights on the borrower’s board
of directors.

17. Raising Mezzanine Financing
Best Practices
1 2 3 4
Prepare
Financial information
should be accurate and
complete. Put together a
confidential information
memorandum that
describes the organization
and opportunities, as well
as how the mezzanine
lender’s investment will be
protected and will get paid
back (plus a return).
Run a Process
Terms can vary widely, so
speak with as many
mezzanine lenders as
possible. Running a
coordinated process helps
ensure the borrower is
receiving the most
attractive terms in the
market and helps keep
lenders honest and on
schedule.
Focus on Cost,
Flexibility and Fit
Cost of capital matters,
but it isn’t everything.
Sometimes a lender who
truly understands and
appreciates your business
can take you further than
the lowest cost provider,
particularly when things
don’t go as planned.
Bring in Help
When Needed
Create a strong deal
team. Despite the costs,
involving a good attorney,
accountant and
investment banker can
streamline a capital
raising process, help
negotiate a better deal
and ensure that really
expensive mistakes don’t
get made.

18. About Us
Access Capital Partners is an investment bank that
helps entrepreneurs and financial sponsors raise
debt and equity capital for privately held, middle
market businesses in all types of situations.
STRATEGY | CAPITAL RAISING | EXIT ADVISORY
$8.0B+ 100+ 35+ 1000+
In total transaction
experience
Completed transactions Years of middle
market experience
Relationships with
capital providers and
strategic buyers across
the globe
Members of Access Capital are registered representatives of and conduct securities transactions through StillPoint Capital, LLC, Member FINRA/SIPC,
13051 W. Linebaugh Ave., Ste. 1, Tampa FL. StillPoint Capital is not affiliated with Access Capital.

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