An Introduction to Mezzanine Debt Investment

Mezzanine debt is an alternative form of financing used by companies at an intermediate stage between venture capital and bank financing. Mezzanine debt provides short-term capital without diluting equity. It thus enables companies to finance their growth without having to turn to the capital market.

Mezzanine debt is usually provided by institutional investors such as venture capital funds, hedge funds, private equity firms and private equity funds. Mezzanine investors seek a stake in the company in the form of a loan with a return of capital, plus interest and a premium.

Mezzanine debt is often a compromise between interest rate and return, compared with basic debt financing. Interest rates are generally higher than for bank loans, due to the greater risk taken by mezzanine investors. Mezzanine debt is generally regarded as a high-risk, high-return investment.

Advantages of mezzanine debt:- Provides an additional source of financing- Interest costs are generally lower than those of equity- Can be used to finance acquisitions, restructurings, mergers, etc.

Disadvantages of mezzanine debt:- Risk is higher than with bank loans- Investors may have requirements for the lender that are not necessarily in line with the company's objectives- Mezzanine debt is generally unsecured, and consideration may be demanded if the terms of the loan are not met.