Mezzanine Capital

Mezzanine capital is long-term debt that occupies the middle layer (hence the name "mezzanine") of the capital structure between senior debt and equity. Mezzanine capital is subordinated in payment priority to senior and traditional asset-backed debt, but senior in payment priority to equity.

Mezzanine capital takes the form of a subordinated note with interest due on a monthly or quarterly basis and principal due at maturity, which is often between four and seven years. Due to the risk orientation of mezzanine capital, the interest rate is higher than senior debt and, in order to align the interests of the mezzanine capital with the investors of a company, there is usually an equity component in the form of warrants or other equity participation.

The primary advantage of mezzanine capital is that it provides a business with long-term financial flexibility compared to senior term debt while also providing a lower cost of capital when compared to private equity. Long-term flexibility is achieved through increased cash flow as principal repayment is deferred to maturity as opposed to monthly or quarterly principal payments that most senior lenders require. Mezzanine capital is thus considered "patient capital" because it allows for the reinvestment of cash into the business. A lower cost of capital is achieved because mezzanine investors target returns that are lower when compared to those of private equity firms. Also, unlike many equity-only junior capital structures, mezzanine capital does not require controlling interest in a business or materially dilute the interest of the owners.