Mezzanine financing provides growing companies with hybrid debt-equity capital, typically as subordinated loans convertible to equity, bridging the gap between senior debt and pure equity investment whilst minimising immediate dilution.
Mezzanine financing is a hybrid form of capital that combines elements of debt and equity, positioned between senior bank loans and common equity in a company's capital structure. Providers offer subordinated loans with high interest rates and often an equity kicker, such as warrants or conversion rights, allowing them to participate in upside potential if the business succeeds.
You typically encounter mezzanine financing when your company needs substantial funds for expansion, acquisitions, or management buyouts but wants to avoid full equity dilution or lacks access to cheaper senior debt. The lender ranks below senior creditors in repayment priority, accepting higher risk for higher returns through interest and potential equity conversion.
In Ireland, mezzanine financing suits mid-market firms with stable cash flows, often arranged through specialist funds or private debt providers. It supports leveraged buyouts whilst preserving founder control, though the high costs demand careful financial modelling before proceeding.
Unlike senior debt, mezzanine financing is unsecured or junior, carrying higher interest rates of 12-20% and flexible repayment via payment-in-kind options where interest accrues rather than paid cash. Traditional equity provides permanent capital without repayment but dilutes ownership immediately, whereas mezzanine delays dilution until conversion.
Mezzanine acts as a bridge, offering debt-like obligations with equity-like rewards. Compared to equity financing, it imposes covenants and repayment schedules but ranks above equity in liquidation. Versus debt financing, it provides more capital with conversion features reducing outright repayment pressure.
Specialist mezzanine funds, private equity houses, and dedicated debt platforms supply mezzanine financing in Ireland, targeting companies valued €10-100 million with EBITDA above €2 million. Funds like BlueBay or Intermediate Capital Group operate locally, often co-investing with senior lenders in buyout deals.
Business development companies and family offices also participate, drawn by the high yields. Enterprise Ireland occasionally supports via hybrid instruments, though private providers dominate for larger transactions. Selection depends on your sector, growth stage, and ability to service payments.
Mezzanine financing delivers large sums quickly without requiring collateral beyond equity covenants, ideal for acquisitions preserving cash reserves. The equity component attracts providers willing to bet on growth, whilst deferred interest eases short-term liquidity strains.
It minimises upfront dilution, allowing founders to retain control whilst funding expansion. Tax-deductible interest enhances returns, and successful repayment strengthens credit profiles for future borrowings. Many users leverage it post-equity financing rounds to extend runway without further share issuance.
High effective costs from interest and warrants make mezzanine expensive, potentially eroding margins if growth falters. Covenants mirror equity oversight, with aggressive enforcement rights including board seats or acceleration clauses upon breach.
Conversion at pre-agreed valuations risks significant dilution during up rounds, frustrating existing shareholders. Failure to refinance or repay triggers equity handover, effectively handing control to lenders. It suits only companies with predictable cash flows and exit horizons.
Securing mezzanine begins with a term sheet outlining amount, pricing, maturity (typically 5-7 years), and conversion mechanics. Due diligence focuses on cash flow projections and collateral value, followed by legal agreements embedding warrants into share options.
Funds disburse post-syndication with senior debt, monitored via quarterly reporting. Repayment occurs via refinancing, free cash flow, or exit proceeds, with conversion triggered by defaults or optional exercise. CRO filings update any charge registrations promptly.
Interest payments qualify as tax-deductible expenses, whilst warrants trigger capital gains on exercise. Thin capitalisation rules limit debt deductions if equity ratios falter, and Revenue scrutinises payment-in-kind to prevent abuse. Professional advice ensures compliance whilst optimising structures.
