Mezzanine versus Equity Investors

by a searcher from California State Polytechnic University - Pomona

2 years ago

What are the advantages and disadvantages of Mezzanine debt versus Equity Investors in completing a Capital Stack and filling Gap Equity?  

As a self funded searcher I am working through the structure of each and in modelling it seems like the Mezzanine would provide greater equity for the searcher and greater returns. So why not focus on that structure?

Am I missing something here?  Seems like most interest I see on posts are for equity investors to fill the gap.

3 likes
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10 comments

searcher from College of William and Mary - Raymond A. Mason School of Business

There are horror stories out there about tripping covenants, triggering default, and losing the keys to the operation. However, an equity/cash infusion is a common cure clause. Another outcome is that the mezzanine debt provider forces liquidation of the business, because they do not have the operational expertise or desire to take over the business. Like anything, having the right partners is a key.. references from mezz provider of a party that has defaulted is worth requesting.

2 years ago | like reply | 1 like

searcher from New York University - Leonard N. Stern School of Business

There is no right answer on this. It is all about risk vs return. Equity investors expect a higher return for taking a greater risk. As such, you the seller are going to have to provide more return in exchange for equity capital.

2 years ago | like reply | 0 likes

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