Mezzanine capital/fund

A mezzanine fund is a pool of capital to be invested in mezzanine finance. Mezzanine finance is a mix of part debt and part equity financing. They are like warrants, containing equity-based options, along with a lower-priority debt for providing flexible long-term capital for a company to achieve its business objectives. In the case of a company default, it gives the lender an option to convert into an equity stake of the company. This conversion right can only be executed after other senior lenders or investors such as VC are paid, since mezzanine capital financing is unsecured. Consequently, it usually has a higher interest rate (for example, 12% to 20%) and a higher portion of equity stake when a conversion occurs. A mezzanine capital investment period is normally five to seven years.

Mezzanine financing can be structured as debt, for example, a subordinated and unsecured note or preferred shares. Here are two examples:

• $150m of unsecured subordinated notes with warrants: 12% interest rate under unsecured subordinated notes or if warrants being converted into equity and 5% of the ownership of the company
• $120m of redeemable preferred shares with warrants: 14% interest rate on preferred shares or if being converted into equity and 6% of the ownership of the company

For a company, mezzanine financing represents a third financing option, together with a standard loan or equity fundraising. It provides a way for founders of a company to raise a portion of funds via debt-like financing without diluting their ownership of the company. A company can use this money to finance acquisitions, make company buyouts, support growth, or prepare for an IPO.