AUS
NZ
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USA
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GER
ESP
ITA
NLD
PRT
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IND
POL
BRA
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RUS
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UAE
Highlights
- Positioned between senior debt and equity in the capital hierarchy
- Includes subordinated debt or preferred equity instruments
- Offers flexible financing with higher returns for investors
Mezzanine capital is a unique form of financing that occupies an intermediate position in a company’s capital structure. It sits between senior debt—such as loans secured by assets—and common equity, which represents ownership in the company. Because of this middle-tier placement, mezzanine capital is considered riskier than senior debt but safer than equity from an investor's standpoint.
This type of capital often takes the form of subordinated debt or preferred equity. Subordinated debt is essentially a loan that ranks below senior loans in terms of claims on assets in the event of default. Preferred equity, on the other hand, typically does not carry voting rights but gives holders priority over common shareholders when it comes to dividends and liquidation proceeds.
Mezzanine financing is commonly used by companies looking to fund expansion, acquisitions, or recapitalizations without diluting ownership through issuing more equity or over-leveraging through additional senior debt. It provides the company with capital while allowing lenders or investors to command higher returns, reflecting the elevated risk profile.
For the issuer, mezzanine capital is an attractive option when senior debt is either not available or not sufficient to meet funding needs. It also allows the company to maintain greater control since it typically doesn’t require giving up board seats or ownership like common equity might.
Conclusion
Mezzanine capital plays a crucial role in bridging the gap between debt and equity, offering a flexible and strategic financing option. While it comes at a higher cost than senior debt, it provides valuable funding opportunities without immediate dilution of ownership, making it a preferred choice for growing companies.
