Mezzanine capital: closing the gap between the bank loan and the investor's equity
The bank lends up to 50–60% of value, the buyer has 20–25%. Mezzanine fills the gap: dearer than the bank, cheaper than an equity partner. How the layer works, who provides it and where the risks are.
Carte Capital · 5 min read
The idea
Mezzanine sits between senior bank debt and the owner’s equity. It is repaid after the bank but before shareholders. That makes it more expensive than a bank loan and cheaper than giving a partner a stake in the asset. It is used when the bank will not lend enough and the buyer does not want to share control.
Structure
A typical acquisition structure:
- Senior debt secured on the asset, usually up to 50–60% of value.
- Mezzanine lent not to the property company but to its owner, secured on its shares, so it ranks structurally below the bank.
- The buyer’s equity covers the rest.
The bank and the mezzanine lender sign an intercreditor agreement. It sets when mezzanine gets paid, whether it can buy out the bank and whether it can take the asset by enforcing on the shares if the borrower defaults.
Parties
| Party | Role |
|---|---|
| Bank | senior lender, mortgage over the asset |
| Mezzanine lender (fund, family office, investor) | pledge over the property company’s shares |
| Buyer | equity, control of the asset |
Numbers: an illustrative example
An asset priced at RUB 3bn. The bank lends 55% (RUB 1.65bn), the buyer puts in 25% (RUB 0.75bn). Mezzanine fills the 20% gap (RUB 0.6bn). Without it the buyer would need another RUB 0.6bn of its own or a partner taking a stake. Mezzanine is usually priced well above bank debt and often takes a share of the profit on sale.
The example is illustrative and does not describe a specific deal.
Risks
- For the buyer: total leverage of 75% or more. A fall in income erodes equity faster.
- For the mezzanine lender: on default the bank is paid first. Protection comes from the share pledge and the right to buy out the senior debt.
- For the bank: a second lender can block decisions, hence detailed intercreditor agreements.
Lessons
- Mezzanine fits when the asset has stable income and the buyer needs leverage above the bank’s limit.
- Compare its price with the cost of equity, not with the bank loan.
- The intercreditor agreement matters more than the coupon: it decides who does what when things go wrong.
In our practice
We have raised bank and mezzanine financing for the acquisition of a large Moscow business centre. The case: Acquisition finance: buying a Moscow business centre.