Private debt is a broad term that refers to debt that is held or executed in a privately held company. As noted on the PitchBook blog, private debt comes in many forms – but the most common are non-banks who lend to private companies or buy those loans in the secondary market.
The range encompasses several sub-categories of private debt funds, and each has its own unique mix of relative risk / return characteristics – from direct lending and distressed debt to venture debt.
Here we take a closer look at a sub-category of private debt funds in particular: mezzanine debt.
What is mezzanine debt?
Mezzanine bonds are subordinated bonds with embedded equity instruments. These instruments are known as warrants, which are equity rights. Equity embedded with the debt can also include call options and rights. Mezzanine debt is often used as part of leveraged buyouts.
What is Subordinated Debt?
Subordinated liabilities refer to loans with a lower priority than senior (or secured 0 liabilities in the event of bankruptcy or liquidation).
What is a Leveraged Buyout (LBO)?
A leveraged buyout (LBO) is when an investor acquires a controlling interest in a company with a combination of equity and a significant amount of debt that the company eventually has to repay. The investor is working to improve the company’s profitability so that paying off the debt is less of a financial burden on him.
Why would a company take mezzanine bonds because the interest rate is higher compared to standard bonds?
There are two main benefits businesses get from taking on mezzanine debt:
First, it provides business owners with a source of capital that would otherwise not be accessible through senior (or secured) leverage. Lenders who offer secured loans that have lower interest rates than mezzanine loans and are backed by a company’s property, plant and equipment typically only cover up to 75% of a given funding event. Mezzanine financing enables companies to access significant amounts of additional growth capital while investing less money upfront.
Second, it is not necessary for entrepreneurs to sell an interest in their company. The only other option that owners typically need to raise the capital needed to grow their business is to sell an interest in their business – either to a venture capital company or an investment company. Assuming the value of the business increases, selling any portion of it early in the life cycle could result in a loss well in excess of the original interest payments on the mezzanine debt.
Mezzanine debt also often involves pure interest payments with no required principal payments prior to maturity. Assuming the borrowing company grows – either by acquiring another company through a leveraged buyout or by investing in its own organic growth – it doesn’t have to pay such high interest rates for long.
That’s because as the company’s value increases, the company will be able to refinance the original mezzanine debt into a single secured senior loan at a lower interest rate, effectively reducing the initial capital lockup and increasing the return on the original investment . , all without loss of equity.
Private companies that recently took on mezzanine debt
- Last Deal: $ 406.85M (Debt Refinance, September 2021)
- Amount raised so far: $ 288.08 million
- Revaluation: $ 841.21 million
The Berlin cleantech startup Enpal develops solar modules that are supposed to make renewable energies accessible to everyone. The company installs solar panel systems that are configured precisely according to the requirements of the customer and all available technologies.
Enpal closed a rescheduling round of € 406.85 million in September 2021.
- Last deal: $ 1.7 billion (buyout / LBO, July 2021)
- Revaluation: $ 1.7 billion
Headquartered in Carlsbad, California, TaylorMade is a 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 in July 2021 under a $ 1.7 billion LBO.
- Last deal: $ 6M (mezzanine, June 2021)
- Amount raised so far: $ 6 million
Beloit, Wisconsin’s PlayMonster is the designer and manufacturer of toys and games for children, adults and families. The company provides entertainment products such as children’s puzzles, preschool toys, creative activities, and educational materials that are distributed in 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 in debt financing in the form of a first-lien loan of $ 6 million and a $ 3.09 million delayed term loan from WhiteHorse Finance. The funds were used to support the takeover to the Ann Williams Group.
More on private debt
Dive into corporate debt data to find details of deals and more
Explore PitchBook’s global debt data
What Are the Most Active Lenders to U.S. PE-Backed Firms in 2021?
Read our blog post on the companies that lead the private debt market
Learn how the regulatory environment following the global financial crisis created demand for non-bank lenders
Read our blog post on the private debt shift since the Great Recession
The specifics of direct lending
Read our Q&A with Dylan Cox, Head of Private Market Research at PitchBook
The private debt environment remains buoyant after the COVID-19 setbacks
Download the H1 2021 Global Private Debt Report from PitchBook
Learn more about venture debt, its benefits and its future
Watch our video on how growth equity and venture debt are born