Mezzanine Financing
A hybrid form of financing that combines debt and equity characteristics, subordinate to senior debt but senior to common equity.
What is Mezzanine Financing?
Mezzanine financing is a hybrid form of capital that sits between senior secured debt and common equity in a company's capital structure. It is typically unsecured subordinated debt with equity conversion features such as warrants, options, or preferred equity components. Because mezzanine lenders take on more risk than senior lenders (they are paid only after senior debt is repaid in a liquidation), they demand higher interest rates — typically 12–20% — and often receive equity participation to boost total returns. Mezzanine financing is commonly used in leveraged buyouts, real estate development, and growth capital transactions where companies need more capital than senior debt can provide but want to minimize equity dilution.
Example
A private equity firm acquires a company for $100M using $60M senior bank debt (6% rate), $20M mezzanine debt (15% + warrants for 5% equity stake), and $20M equity. The mezzanine lender earns 15% cash interest plus potential equity upside. In a successful exit at $160M, the mezzanine lender's equity warrants convert to roughly $8M in additional profit beyond the interest earned.