Mezzanine Financing
Mezzanine financing is a layer of capital that sits between senior debt and equity in the capital stack. It is subordinated to senior debt but ranks ahead of common equity, and is usually structured as subordinated debt with an equity kicker or as preferred equity. It costs more than senior debt and less than equity, and is used to fill the gap between what senior lenders provide and the total capital a deal needs.
Where Mezzanine Sits in the Capital Stack
Every financed deal has a capital stack, ordered by who gets paid first and who bears the most risk. Senior debt sits at the top, repaid first and secured by collateral. Common equity sits at the bottom, last to be paid but with unlimited upside. Mezzanine financing is the layer in between: subordinated to senior debt, so it is paid after the senior lender, but senior to equity, so it is paid before the owners. That middle position is the source of both its higher cost and its usefulness.
| Layer | Priority | Typical cost to the borrower |
|---|
| Senior debt | Paid first, secured | Lowest |
| Mezzanine | Paid after senior, before equity | In between |
| Common equity | Paid last | Highest (dilution and upside) |
How It Is Structured
Mezzanine is most often subordinated (or second-lien) debt, frequently carrying an equity kicker such as warrants that give the lender a slice of the upside. It can also take the form of preferred equity. Interest is commonly split between cash pay and payment-in-kind (PIK), where part of the return accrues to the balance rather than being paid in cash, which eases the borrower's near-term cash flow. The return sits above senior debt rates to compensate for the subordinated, often unsecured position.
Why Borrowers Use It
Mezzanine fills the gap between the amount a senior lender will advance and the total capital a transaction requires, without the owners having to write the whole remaining check as equity. It is cheaper than raising equity and avoids some dilution, while giving the borrower more total leverage than senior debt alone would allow. Common uses include buyouts and acquisitions, commercial real estate, growth capital, and recapitalizations.
Why It Is a Private Credit Strategy
Mezzanine is a core private credit strategy, because the returns and the bespoke, negotiated structures suit funds rather than banks. Mezzanine positions come with the same servicing and oversight demands as other private debt: tracking cash and PIK interest, testing covenants, and reporting to limited partners. In commercial real estate, a mezzanine loan often stacks on top of a senior mortgage to push total leverage higher than the senior lender alone would allow.
How Zolvo Fits
For funds running mezzanine and other private-debt positions, Zolvo automates the servicing layer: applying and reconciling payments, tracking cash and accrued PIK interest, monitoring covenants, and producing the LP and investor reporting these structures require, on top of the systems already in place.
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