Mezzanine Financing: Flexible Capital Between Debt and Equity
Mezzanine financing sits between senior debt and equity in the capital stack. It provides growth capital, acquisition financing, or recapitalization without diluting ownership. PeerSense connects you with mezzanine lenders who understand your deal.
What Mezzanine Does in a Deal
Subordinated debt that bridges the gap between senior debt and equity
Subordinated Position
Mezzanine debt is subordinated to senior debt (second lien). In a default scenario, senior lenders are paid first. This subordinated risk position is why mezzanine carries higher rates than senior debt.
Fills Capital Gaps
Senior lenders typically cap at 65–75% LTV. If you need 85–90% total leverage, mezzanine fills the gap. This allows you to preserve equity and maintain control while still completing the transaction.
Custom Structures
Mezzanine can be structured as debt, preferred equity, or hybrid instruments. Terms are negotiable based on deal specifics, exit strategy, and sponsor strength. Flexibility is the key advantage.
Preferred Equity: When Debt Structure is Maxed Out
Preferred equity is an equity-like instrument used when the debt structure is maxed out or when lenders won't allow additional debt layers. It functions similarly to mezzanine but sits in the equity portion of the capital stack. Preferred equity holders receive priority distributions before common equity but after all debt is serviced.
Typical Use Cases
Common applications for mezzanine financing
Acquisition Finance
Complete commercial real estate or business acquisitions when senior debt won't cover the full purchase price. Mezzanine fills the gap between senior debt and your equity contribution.
Real Estate Development
Fund construction or major renovations when construction loans cap at 70–75% of total project cost. Mezzanine covers the gap to completion without diluting ownership.
Leveraged Buyouts
Finance management buyouts, partner buyouts, or ownership transitions. Mezzanine allows buyers to acquire businesses with minimal equity while maintaining control.
Growth Capital
Fund expansion, equipment purchases, or working capital needs without selling equity. Mezzanine provides flexible capital for established businesses with strong cash flow.
The Capital Stack Explained
How mezzanine debt fits in the capital structure
| Position | Source | Risk | Return |
|---|---|---|---|
| Senior Debt (1st Lien) | Bank / SBA / CMBS | Lowest | Lowest (4–8%) |
| Mezzanine / Preferred Equity | Private Credit | Middle | Middle (10–18%) |
| Common Equity | Sponsor / Owner | Highest | Highest (Variable) |
Risk & Return Relationship
Mezzanine lenders take more risk than senior lenders (they're paid second in a default) but less risk than equity holders. This middle position commands middle returns — typically 10–18% depending on deal structure.
Intercreditor Agreements
Senior and mezzanine lenders sign intercreditor agreements defining each party's rights in default scenarios. These agreements protect both lenders while allowing the deal to close with multiple debt layers.
When Mezzanine Makes Sense
Situations where mezzanine financing is the right solution
When You Need More Than 80% LTV
Senior lenders typically cap at 65–80% loan-to-value. If you need higher leverage to complete the deal, mezzanine fills the gap without requiring you to bring more equity.
When Senior Debt Won't Cover Full Acquisition
Acquisition financing often requires 20–30% equity. Mezzanine reduces your equity requirement, allowing you to preserve capital for operations, improvements, or other investments.
When You Want to Avoid Selling Equity
Bringing in equity partners means diluting ownership and sharing control. Mezzanine is debt (or debt-like), allowing you to maintain full ownership while still accessing the capital you need.
Cost vs. Control Trade-Off
Mezzanine rates (10–18%) are higher than senior debt but lower than the cost of equity dilution. If maintaining control and ownership is worth the premium, mezzanine is often the right choice. The math depends on your exit strategy, hold period, and projected returns.
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Frequently Asked Questions
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