Definition of Mezzanine Investment
Mezzanine investment financing (also referred to as third-stage capital) refers to a later-stage investment provided to a company that is already producing and selling a product or service, for the purpose of helping the company achieve a critical objective that, in many cases, will enable it to go public. Mezzanine investment financing provides for major expansion in companies whose sales are increasing, and whose cash flow is break-even or slightly positive.
Example of Mezzanine Investment
Company A is expanding and intends to build a new office complex. All preliminaries are in place: the plans, zoning approvals, building contractors, and long-term financing. The long-term financing consists of senior debt of $250,000,000 and a subordinate debt of $50,000,000.
Company A has its long-term financing but cannot receive the money because they haven’t built the asset and the long-term providers are unwilling to assume construction risk. That’s when Company A obtains mezzanine debt to cover the costs during the build-up. When the long-term financing agreement is satisfied (i.e. certificate of occupancy, XX% vacancy, etc.) then the long-term financing can begin and the $300,000,000 mezzanine debt is retired.
It’s important to remember that “mezzanine” is point A to point B money, and the distance between the two points is consistently short-term.