What is mezzanine financing?

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

If you study the topic of money, then one of the most interesting aspects is such a direction as types of financing. Here you can learn about the many possibilities for using the funds. We will consider mezzanine financing within the framework of the article.

General information

What is meson financing? In another way, it can be called as indirect. Its essence lies in the fact that the money is provided literally "under" parole. That is - without collateral.

What attracts investors in such cases? The most important aspect is the high return on capital in this case. In addition, here the investor does not assume the risks that accompany direct investment. And besides this, there are a number of other advantages. What else is there?

The benefits of mezzanine financing

Here is a small list:

1. For financiers, the advantage is that they can get money when they don't have enough collateral or simply don't meet the financial requirements to get a standard bank loan. There may be some other reasons, but still, those listed are the main ones.
2. Less equity dilution. This is true for companies with high growth potential as it makes them more expensive.
3. The owners retain control of the company. The investor's interest is not focused on making the shares as expensive as possible, but on getting the planned income. Therefore, their less activity is observed, which has a positive effect on management. Although the mezzanine investor is still often given the opportunity to influence key decisions.
4. You can also speak positively about the settlement system, which is quite flexible.

Negative aspects

Alas, but it has already become a tradition in our world that where there are positive moments, there are also negative ones. These include:

1. Complexity and high cost of registration (when compared with financing from banks). This situation has developed due to high rates, as well as due to the fact that each transaction is individually structured.
2. Restrictions on the possibility of early withdrawal of investors from participation in the enterprise. This is especially true for small and medium-sized economic entities that do not have debt protection.
3. There are also stringent requirements regarding accountability, transparency and the management team of the borrower.

These are the negative aspects of a mezzanine loan.

How is it going?

An important role in this scheme is played by an investment bank. It's financialan institution may use several basic tools or a combination of them. In addition to the mezzanine loan itself, money can be provided subject to certain conditions.

Initially, let's consider the first option as the most common. In such cases, a certain amount is provided, which the lender previously transferred to the investment bank, and he already transferred to the subject of economic activity. In return, he receives the right to retain property. Important is the institution of guarantee, which can take many forms. As a rule, the term of the grant is up to ten years, during which the mezzanine financing is carried out.

An example of such interaction can be given by pointing to the many large companies and corporations that are now operating in the United States and Western Europe. Although risky, this approach is popular due to the fact that it brings a profit of 12-45 percent per annum.

In our conditions it may seem that this is not very much, but do not forget that this is in dollars and euros. In our more or less stable banks, there are few places where you can get even half the minimum. This is the advantage of mezzanine financing.

Other tools

In addition to the option discussed above, financing can be carried out with the so-called formalization of tacit participation. In such cases, the investor receives a certain share of the company, but he is not liable to other creditors. This state of affairs is not disclosed to third parties. And participation in profits, losses, control and management is carried out on a confidential basis.

The instrument of financing through the issuance of convertible bonds is also common. This involves paying fixed interest and repaying the debt, with the option for the investor to acquire a portion of the company to which the money is being given. Moreover, a certain conversion price is set in advance. Also, a condition for the provision of money may be the issue of preferred shares, which give a pre-emptive right to profits and assets compared to other owners.

Conclusion

And what attracts investors in such cases? Despite the fact that these are rather risky enterprises, creditors are not averse to participating in the development of promising economic entities. Many of them are aiming not only to earn interest that is well above the rate of inflation, but also to gain exposure to the shares of companies with good prospects. After all, they are most interested in their own good future. Therefore, they turn to people who specialize in this.

And for companies, especially small and medium ones, this approach has the advantage that, after bargaining, they can get very good conditions, according to which, the loss of profit will be temporary. Then all rights will return, and it will be possible to develop at full strength, realizing your potential.