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Mezzanine Capital: Definition, Meaning & Key Features

Anshika

Learn how mezzanine capital blends debt and equity to offer flexible financing options for businesses.

Mezzanine capital plays a pivotal role in corporate financing, especially for companies seeking growth without immediately diluting ownership. Positioned between senior debt and equity, it allows access to funds with structured flexibility. This article explains the fundamentals, features, and real-world usage of mezzanine capital in an easy-to-understand manner.

What is Mezzanine Capital

Mezzanine capital is a hybrid form of financing that combines elements of both debt and equity. It is typically used by companies to fund expansion projects, acquisitions, or business growth when traditional lending sources are insufficient. Mezzanine financing often comes into play after senior debt but before equity in the capital structure.

Mezzanine Capital Meaning & Significance

Understanding mezzanine capital is essential as it provides companies with access to capital without diluting ownership immediately. Unlike pure equity, it usually carries a fixed interest rate. However, it also includes options like converting into equity or sharing in company profits, offering investors higher returns in exchange for increased risk. This makes it a crucial tool for businesses looking to maintain control while securing funding.

Features of Mezzanine Capital

Mezzanine capital stands out due to its unique blend of debt and equity characteristics. Key features include:

  • Subordinated status: It ranks below senior debt but above equity in the capital structure.

  • Flexible repayment terms: Often structured with deferred interest payments or balloon payments.

  • Higher returns: Due to increased risk, investors expect higher yields.

  • Equity participation: May include warrants or options for equity conversion.

  • Customised agreements: Structured to meet specific business needs and investor expectations.

Mezzanine Capital vs Senior Debt vs Equity

The following table highlights how mezzanine capital compares with other funding options:

Feature Senior Debt Mezzanine Capital Equity

Ranking in capital stack

First

Between senior debt and equity

Last

Collateral

Typically secured

Often unsecured or partially secured

No collateral

Interest rate/returns

Lower

Higher

Depends on business performance

Ownership dilution

None

Possible (via conversion rights)

Yes

Risk to investor

Lower

Moderate to high

Highest

Control

No ownership rights

Possible board influence

Full ownership rights

Advantages of Mezzanine Capital

Using mezzanine capital can offer several benefits to businesses:

  • Preserves equity control for existing shareholders

  • Enables access to additional funds when traditional debt is insufficient

  • Attracts investors with higher return potential

  • Offers custom structuring aligned with business cash flows

  • Bridges the gap between senior debt and equity requirements

Risks or Limitations of Mezzanine Capital

While flexible, mezzanine financing comes with certain challenges:

  • Higher cost of capital due to increased risk for investors

  • Potential dilution if equity conversion is triggered

  • Complex legal and financial structuring

  • Can strain cash flows due to interest payments

  • Subordinate nature increases default risk in adverse conditions

Typical Terms & Structure

Mezzanine deals are highly negotiated and may include the following components:

  • Interest payments: Often deferred or structured with PIK (payment-in-kind) interest

  • Equity kickers: Warrants or options allowing investors to acquire equity at a later stage

  • Repayment terms: Generally 3 to 7 years, with flexibility in repayment schedules

  • Covenants: Looser than senior debt but still include certain performance obligations

  • Security: May or may not be backed by assets depending on the agreement

Examples of Mezzanine Capital

Mezzanine financing is commonly used in:

  • Private equity buyouts: To fill the gap between senior loans and equity funding

  • Business expansion: Medium-sized companies looking to scale operations

  • Management buyouts (MBOs): Allows internal teams to acquire controlling stakes without immediate dilution

  • Real estate development: Builders use mezzanine debt to supplement construction loans

For instance, a mid-sized manufacturing company looking to expand its production facility might raise ₹10 Crores in senior debt. If the total project cost is ₹15 Crores, the remaining ₹5 Crores could be raised through mezzanine capital without immediately giving up equity control.

Conclusion

Mezzanine capital serves as a strategic financing option that balances the benefits of debt with the flexibility of equity. It can enable companies to raise funding while retaining control; it is a financing option that carries trade-offs and should be evaluated against cost, covenants and dilution risk.

Disclaimer

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.

FAQs

What distinguishes mezzanine capital from ordinary debt?

Ordinary debt typically ranks higher in repayment priority and carries lower interest rates. Mezzanine capital, on the other hand, is subordinate, riskier, and often includes equity conversion features.

What types of companies use mezzanine capital the most?

Mid-sized companies, especially those involved in acquisitions, expansions, or management buyouts, frequently use mezzanine capital. It is also common in private equity-backed businesses.

What are “equity kickers” in mezzanine capital?

Equity kickers are provisions such as warrants or options that allow mezzanine lenders to acquire a stake in the company’s equity at a predetermined price, offering upside potential.

What repayment terms are common in mezzanine deals?

Repayment terms usually span 3–7 years, with options for deferred interest, bullet payments, or PIK interest structures. Terms vary depending on the borrower's cash flow and risk profile.

Hi! I’m Anshika
Financial Content Specialist

Anshika brings 7+ years of experience in stock market operations, project management, and investment banking processes. She has led cross-functional initiatives and managed the delivery of digital investment portals. Backed by industry certifications, she holds a strong foundation in financial operations. With deep expertise in capital markets, she connects strategy with execution, ensuring compliance to deliver impact. 

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