Mezzanine Finance — Business Finance Glossary

What mezzanine finance is

Mezzanine finance sits in the capital structure between senior secured debt — which has first call on assets — and the equity held by shareholders. Because mezzanine lenders accept a weaker security position, they price this risk into higher returns, often through a combination of interest and an equity participation right (a warrant or equity kicker).

It is not a product with a single fixed form. Some mezzanine facilities look like subordinated loans; others include convertible notes or preferred equity. What they share is subordination to the senior lender and a return that reflects that subordination.

When businesses use mezzanine finance

Mezzanine is most common in leveraged buyouts, management buy-ins, and growth-capital transactions where the senior lender caps its advance at a multiple of EBITDA and the buyer cannot or will not contribute sufficient equity to close the gap. It is also used in real estate development finance and in recapitalisations where the shareholders wish to extract value without full dilution.

For UK limited companies and LLPs, mezzanine can be a practical route when the balance sheet supports additional debt in principle but the senior lender has reached its internal concentration limit.

Key structural features to understand

Mezzanine lenders typically require an intercreditor agreement with the senior lender that governs enforcement standstills, payment waterfalls, and the circumstances in which the mezzanine provider can accelerate. Directors should expect a standstill period during which the mezzanine lender cannot enforce independently if the senior lender objects.

• Interest may be cash-pay, payment-in-kind (PIK), or a blend
• Equity kickers dilute shareholders if exercised — model this carefully
• Intercreditor terms can restrict operational flexibility
• Prepayment may trigger make-whole or exit fees

Mezzanine vs. senior debt

Senior debt is cheaper and carries stronger covenants over the borrower's behaviour; the senior lender's security ranks first. Mezzanine is more expensive but lenders may accept looser operational covenants because their return expectations are higher and they hold an equity upside. The combination of the two layers is called a leveraged capital structure, and the interplay between them is governed by the intercreditor deed. Confirm the precise structure and costs with your legal and financial advisers before proceeding.