3 questions to smart minds
Photo: R. Eschmann | BE Investment-Partners

The market for mezzanine financing on the upswing

For this 3 questions to R. Eschmann

BE Invest­ment Partners
Photo: R. Esch­mann | BE Investment-Partners
17. Septem­ber 2013

The mezza­nine market is on the move: While some mezza­nine programs are gradu­ally coming to an end, new money is flowing into the market. For exam­ple, a new mezza­nine fund of funds has been laun­ched under the direc­tion of the Euro­pean Invest­ment Fund. The 200 million euros are to be chan­nel­led into mezza­nine funds that make it easier for medium-sized compa­nies to obtain finan­cing. For which compa­nies, in which situa­tions and in which sizes can mezza­nine finan­cing be gene­rally considered?

For this 3 ques­ti­ons to Mana­ging Part­ner at BE Invest­ment-Part­ners in Colo­gne, Germany

1. For which compa­nies and in which situa­tions can mezza­nine finan­cing be considered?

Mezza­nine finan­cing is gene­rally conside­red for compa­nies that have estab­lished them­sel­ves sustain­ably on the market with their busi­ness model and products and would like to solidly secure their further growth not exclu­si­vely through loans, but through balance sheet-impro­ving funds. Espe­ci­ally when no change in the share­hol­der struc­ture is desi­red or possi­ble, but the finan­cing is to have an equity or equity-like effect, mezza­nine finan­cing is an attrac­tive suita­ble finan­cing instrument.

Due to the ongo­ing inte­rest payments, mezza­nine finan­cing is rather unsui­ta­ble for compa­nies in the start-up or early stages and for compa­nies in a restruc­tu­ring situa­tion. Here, direct parti­ci­pa­tion is the “right” finan­cing instrument.

2. Why is mezza­nine finan­cing beco­ming more attrac­tive for both inves­tors and entrepreneurs?

In times of vola­tile capi­tal markets and low bond inte­rest rates, mezza­nine port­fo­lios offer inves­tors a very inte­res­t­ing current yield. Howe­ver, it is important that mezza­nine port­fo­lios are assem­bled and mana­ged by expe­ri­en­ced mana­gers after careful (private equity-like) exami­na­tion of the indi­vi­dual compa­nies. The stabi­lity of the finan­ced compa­nies is the decisive compo­nent for inves­tor success.

What compa­nies appre­ciate most about mezza­nine finan­cing is the flexi­ble struc­tu­ring opti­ons (silent part­ner­ship, profit parti­ci­pa­tion rights, subor­di­na­ted capi­tal, etc.), which allow the finan­cing to be tail­o­red to the indi­vi­dual finan­cing occa­sion, the initial balance sheet situa­tion and the inte­rests of manage­ment and share­hol­ders. Next to it is

  • the long term of the capi­tal (usually 5 to 7 years),
  • gran­ting without the requi­re­ment to provide colla­te­ral (exis­ting colla­te­ral is thus available for other finan­cing, thus incre­asing the scope for credit creation),
  • the preser­va­tion of entre­pre­neu­rial independence
  • and, last but not least, the “quality seal” effect that mezza­nine finan­cing has on other finan­cing and market part­ners is very inte­res­t­ing for companies.
3. (How) Will mezza­nine terms change with poten­ti­ally rising inte­rest rates?

Before the launch and after the expiry of the stan­dard mezza­nine programs, the condi­ti­ons for mezza­nine finan­cing proved to be quite “price stable”. I ther­e­fore do not expect a propor­tio­nal increase in terms and condi­ti­ons even if the gene­ral inte­rest rate level rises. 

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