Mezzanine finance is primarily used in structured leveraged transactions. Typical transactions include the following: i) management buyouts/buy-ins, where a mezzanine layer is used to bridge the gap between senior bank facilities and equity provision by the management and equity sponsor; ii) financing a company’s growth by acquisitions or organic expansion and, iii) re-financings, so the equity investors can free capital by re-leveraging the business.

Mezzanine is typically characterised by lower risk in comparison to equity, a high share of the contractual fixed income stream and often some upside in the form of warrants, options or other performance driven instrument. The role of traditional mezzanine debt is to form an intermediate financing layer, filling the gap between senior secured debt and equity. In terms of priority, mezzanine finance ranks behind senior debt but before equity.

The general demand for mezzanine financing derives from situations when equity investors need external monies for financing transactions or projects, in addition to that available from traditional senior loans, but which also wish to limit the equity allocated to the project. For equity investors seeking over circa 20% return on their investments, mezzanine finance is generally regarded as a cost effective and flexible substitute for equity.

A sizeable equity contribution from strong equity sponsors will limit the downside risk or the risk of outright losses of the mezzanine tranche. Having strong equity backing is imperative and is one of Carta Capital’s fundamental investment objectives.