Private debt is a broad term that applies to debts held or executed to privately held companies. As previously covered on the PitchBook blog, private debt comes in many forms—but it most commonly involves non-banking institutions making loans to private companies or buying those loans on the secondary market.
range of private debt fund sub-categories are involved in the space, and each has its own unique mix of relative risk/return characteristics—from direct lending and distressed debt to venture debt.
Here, we’re taking a closer look at one private debt fund sub-category in particular: mezzanine debt.
What is mezzanine debt?
Mezzanine debt is a type of subordinated debt with embedded equity instruments attached. Those instruments are called warrants, which are equity participation rights. Embedded equity with the debt can also include call options and rights. Mezzanine debt is often used in the context of leveraged buyouts.
What is subordinated debt?
Subordinated debt refers to loans with a lower priority than senior (or secured0 debt in the event of bankruptcy or liquidation. Also called junior debt, subordinated debt is a lesser priority when it comes to repayments, too.
What is a leveraged buyout (LBO)?
A leveraged buyout (LBO) is when an investor purchases a controlling stake in a company using a combination of equity and a significant amount of debt, which must eventually be repaid by the company. The investor works to improve the company’s profitability so that the repayment of the debt is less of a financial burden for them.
Why would a company take on mezzanine debt given its higher interest rate compared to standard debt?
There are two main benefits companies receive from taking on mezzanine debt:
First, it gives business owners a source of capital that would otherwise be inaccessible through senior (or secured) debt financing. Lenders offering secured loans, which have lower interest rates than mezzanine debt and are backed by a company’s tangible assets, will usually only cover up to 75% of a given financing event. Mezzanine debt allows companies to access significant amounts of additional growth capital while putting less money down up front.
Second, it doesn’t require business owners to sell a stake in their company. The only other option owners typically have to raise the capital they need to grow their business is to sell a stake in their company—either to a venture capital or pricate equity firm. Assuming the company grows in value, selling part of it off early in its lifecycle can result in a loss far greater than the original interest payment of the mezzanine debt.
Mezzanine debt also often involves interest-only payments, with no required amortization payments before maturity. Assuming the borrowing company is growing—either by acquiring another company through a leveraged buyout or investing in its own organic growth—it won’t need to pay that high interest rate for long.
That’s because, as the value of the business grows, it will be able to refinance the original mezzanine debt into a single, secured senior loan with a lower interest rate—effectively reducing its initial capital commitment and increasing its rate of return on its original investment, all without losing any equity in the business.
Private companies that recently took on mezzanine debt
Enpal
- Last deal: $406.85M (debt refinancing, September 2021)
- Total raised to date: $288.08M
- Post valuation: $841.21M
Berlin-based cleantech startup Enpal develops solar panels designed to make renewable energy accessible to everyone. The company installs solar panel systems configured to the exact right specifications based on the customer’s needs and all available technologies.
Enpal completed a $406.85M debt refinancing round in September 2021 that consisted of secure senior debt from BlackRock, Pricoa Private Capital and UniCredit, as well as a subordinated mezzanine loan from undisclosed lenders.
TaylorMade
- Last deal: $1.7B (buyout/LBO, July 2021)
- Post valuation: $1.7B
Headquartered in Carlsbad, California, TaylorMade is the manufacturer of high-performance golf equipment and accessories, including golf balls, drivers, wedges, putters, sets, bags and more.
TaylorMade was acquired by Korean PE firm Centroid Investment Partners through a $1.7 billion LBO in July 2021. The company received $725 million in senior borrowing, $225 million of subordinated borrowing and $430 million of mezzanine to support the transaction.
PlayMonster
- Last deal: $6M (mezzanine, June 2021)
- Total raised to date: $6M
Beloit, Wisconsin’s PlayMonster is the designer and manufacturer of toys and games for children, adults and families. The company offers entertainment products like children’s puzzles, preschool toys, creative activities and teaching tools that are distributed throughout the US and UK.
The company raised an undisclosed amount of mezzanine financing from Patriot Capital and Spring Capital Partners in June 2021. The company also received $9.1 million of debt financing in the form of a $6 million first-lien loan and a $3.09 million first-lien delayed drawn term loan from WhiteHorse Finance. The funds were used to support the acquisition to Ann Williams Group.
More on private debt
Dive into corporate debt data to find deal details and more
Explore PitchBook’s global debt data
What are the most active lenders to US PE-backed companies in 2021?
Read our blog post about the firms leading the private debt market
Learn about how the post-global financial crisis regulatory environment created demand for non-bank lenders
Check out our blog post about shifts in private debt since the Great Recession
The ins and outs of direct lending
Read our Q&A with PitchBook’s Dylan Cox, Head of Private Market Research
The private debt environment remains buoyant after COVID-19 setbacks
Download PitchBook’s H1 2021 Global Private Debt Report
Learn about venture debt, its benefits and its future
Watch our video about the emergence of growth equity and venture debt
