MezzanineFund, also known as Monet fund. It is a financing source in leveraged buyouts, especially management buyouts (MBO). It provides funds between equity and creditor's rights, and its role is to fill the gap of acquisition funds that are still insufficient after considering equity funds and ordinary creditor's rights funds. The term MBO fund adopted in China actually refers to mezzanine fund. Because the financing channels in MBO transactions are diversified, the financing structure is hierarchical, and different sources of funds, entry methods, expected annualized expected rate of return and repayment methods are different, it is inaccurate to collectively refer to MBO funds.

organizational structure

mezzanine funds generally adopt limited partnership system, with an unlimited partner as the fund manager, providing 1% of the funds, but assuming unlimited responsibilities. The rest of the fund providers are limited partners, providing 99% of the funds, but only need to bear limited responsibilities within the share of the funds provided. About 2% of the expected annualized income of the fund is allocated to the fund manager, and the rest is allocated to the limited partners. Fund managers of mezzanine funds, also known as leveraged buyouts, act as consultants to the management, and are responsible for organizing the whole MBO transaction structure, especially the financing structure, and providing mezzanine fund financing, which is the soul of an MBO transaction.

function

mezzanine fund's involvement in an MBO transaction reduces the demand for senior creditor's rights funds and equity funds for transaction financing, and improves the security of senior creditor's rights funds such as bank loans, because the mortgage coefficient of enterprise assets has increased, making it easy for MBO transactions to obtain bank loans. In addition, the intervention of mezzanine funds has also increased the attraction of MBO transactions to equity capital providers, because mezzanine funds have their own inherent expected annualized expected rate of return when choosing investment projects. Compared with mezzanine funds, equity capital can obtain higher expected annualized return on investment.

the expected annualized interest rate of the fund's loan

mezzanine funds generally provide unsecured loans, so the loan repayment mainly depends on the cash flow generated by the business operation, and the expected annualized interest rate of the fund's loan is higher than that of the bank loan. The expected annualized interest rate of mezzanine fund loans is the expected annualized interest rate of standard money market funds (such as LIBOR) plus 3-5%. In addition, if the enterprise runs smoothly after three to five years, the fund generally requires a final payment, which is generally issued by the enterprise to subscribe for common shares to mezzanine funds.

Expected annualized return on investment

Generally, five years after the completion of an MBO, if the target enterprise was originally a listed company, the enterprise has gone through the process of delisting, restructuring and re-listing; If the target enterprise is a non-listed company, the enterprise has been reorganized and listed. At this time, the fund providers have respectively withdrawn: the management sells stocks, mezzanine funds and banks all recover the loan principal and interest. Due to the different risks borne by different funds in the financing structure of MBO at all levels, the expected annualized expected rate of return of different funds is also different, and there are great differences. The expected annualized rate of return required by general equity capital providers is over 4%, that required by mezzanine funds is between 2% and 3%, and that required by banks is 2 percentage points higher than the benchmark expected annualized interest rate (such as LIBOR).

Comparison between mezzanine fund and venture capital fund

From the organizational structure, mezzanine fund and venture capital fund are very similar, but mezzanine fund is not an equity investment, and it does not require to obtain the equity of the enterprise, while venture capital must be an equity investment, and the target enterprises of the two investments are different. In addition, the funds of mezzanine funds are smaller than those of venture funds.