Entrepreneurship is a process in which entrepreneurs and business partners work hard to optimize and integrate the resources they own or can own, thus creating greater economic or social value. The following is a brief introduction of mezzanine financing that I have compiled for you, hoping to help you.
Introduction to mezzanine financing
Mezzanine financing is an unsecured long-term debt, accompanied by investors' right to subscribe for the rights and interests of financiers.
Mezzanine financing is only a kind of subordinated debt, but it is often used as a synonym for subordinated debt. The interest rate of mezzanine financing is generally between 10%- 15%, and the target rate of return of investors is 20% ~ 30%. Generally speaking, the lower the mezzanine interest rate, the more rights to subscribe.
Generally speaking, it is to provide financing parties with funds between equity and bonds, usually to fill some capital gaps that are still insufficient after considering equity funds and ordinary debt funds. Therefore, mezzanine funds are essentially a kind of loan funds, ranking behind loans in the repayment order of enterprises.
Mezzanine financing is a technical means of financing, which plays the role of "bridge financing" in many cases, with a general term of one to two years. For example, in mezzanine financing of real estate, the capital demand from enterprises to development loans is met through mezzanine financing.
Mezzanine investment is also a form of investment in private equity market, and it is the evolution and expansion of traditional venture capital. In Europe and America, there are special mezzanine funds. If you use the same amount of equity and senior debt to finance, but there is still a big funding gap, mezzanine financing will provide debt funds with higher interest rate than senior debt, but at the same time bear higher risks. Because mezzanine financing is mostly used to help enterprises improve their asset structure and rapidly increase their turnover, it often provides the right to subscribe for shares when enterprises are listed or acquired while issuing this form of subordinated creditor's rights.
Mezzanine financing and financing development
Mezzanine financing is a part of the overall strategy of financing development.
Mezzanine financing should be regarded as a part of the overall strategy of development financing. Although the cost of mezzanine financing is not cheap, it is sometimes the most suitable financing method. Mezzanine financing is most suitable for enterprises with MBO, M&A plan, rapid growth and about to go public.
Most American investment bankers believe that enterprises must issue more than 500,000 to 1 10,000 shares in order to ensure active stock trading volume and support higher stock prices. At the same time, the stock price must be above $65,438+$00-$20 to attract large institutional investors, while stocks below $5 are generally unattractive. Because the number of stocks can be easily changed by splitting and reverse splitting, the price of stocks mainly depends on the market value of enterprises.
Since the market value of an enterprise depends on its scale, that is, its historical performance and expected performance, if mezzanine financing can greatly increase its turnover within one year and make the public confident in its profitability, its IPO will be in a more favorable position. Under this condition, enterprises can choose mezzanine financing to complete the transition until they realize and prove their market value, instead of IPO or equity private placement at undervalued value now. If an enterprise can conduct an IPO at a higher share price in the future, it will reduce the overall financing cost of the enterprise, which is also the reason why the enterprise is willing to pay higher interest and come to the IPO for a round of mezzanine financing.
Welfare/mezzanine financing
The benefits of mezzanine financing providers are also the main characteristics that distinguish mezzanine investment from typical private equity investment:
Low risk
Investment method with lower risk than stock. The level of mezzanine investment is usually higher than equity investment, and the risk is relatively low. In some cases, the provider of mezzanine financing may gain a favorable position in the following aspects, such as cross-default clauses caused by the default of senior debt borrowers, and the first or second priority of company assets and/or shares. The return on equity obtained by "equity incentive" can also be considerable, and the rate of return can be raised to a level comparable to that of equity investment.
There are many ways to quit.
Exit is more certain. The debt composition of mezzanine investment usually includes a predetermined repayment schedule, which can be repaid in installments or in one lump sum. The repayment method will depend on the cash flow of the target company of mezzanine investment. Therefore, mezzanine investment provides a clearer exit path than private equity investment (the latter generally depends on the more uncertain liquidation method).
Compared with most private equity funds, a large part of mezzanine investment income comes from front-end fees and fixed coupon or interest income. This feature makes mezzanine investment more liquid than traditional private equity investment.
Good liquidity
Compared with most private equity funds, a large part of mezzanine investment returns come from front-end fees and regular coupon or interest income. This feature makes mezzanine investment more liquid than traditional private equity investment.
other
Mezzanine financing is a part of the overall strategy of financing development.
Mezzanine financing should be regarded as a part of the overall strategy of development financing. Although the cost of mezzanine financing is not cheap, it is sometimes the most suitable financing method. Mezzanine financing is most suitable for enterprises with MBO, M&A plan, rapid growth and about to go public.
Most American investment bankers believe that enterprises must issue more than 500,000 to 1 10,000 shares in order to ensure active stock trading volume and support higher stock prices. At the same time, the stock price must be above $65,438+$00-$20 to attract large institutional investors, while stocks below $5 are generally unattractive. Since the number of shares can be easily changed by splitting or shrinking the shares, the price of the shares mainly depends on the market value of the enterprise.
Since the market value of an enterprise depends on its scale, that is, its historical performance and expected performance, if mezzanine financing can greatly increase its turnover within one year and make the public confident in its profitability, its IPO will be in a more favorable position. Under this condition, enterprises can choose mezzanine financing to complete the transition until they realize and prove their market value, instead of IPO or equity private placement at undervalued value now. If an enterprise can conduct an IPO at a higher share price in the future, it will reduce the overall financing cost of the enterprise, which is also the reason why the enterprise is willing to pay higher interest and come to the IPO for a round of mezzanine financing.
Precautions/mezzanine financing
Priority lenders still don't welcome the existence of subprime lenders, even though subprime lenders only have subprime debts. The main objection of priority lenders is that they share the same guarantee with mezzanine financing providers, so they require mezzanine financing providers to accept secondary status in structure (that is, mezzanine financing providers invest in holding companies, while priority lenders provide loans to operating companies).
It is also very important to carefully evaluate the mortgage arrangement obtained by mezzanine financing providers and their ability to enforce the agreement (priority lenders usually limit the ability of mezzanine financing lenders to enforce the mortgage through agreements between creditors).
Priority lenders usually limit the level of cash flowing to mezzanine financing providers through strict agreements, while borrowers usually prepay most of the excess cash to priority lenders as reserves. They also need to make a detailed assessment of the borrower's repayment ability (such as the payment method of interest, dividend distribution or asset disposal).
Mezzanine investments in Asia are usually cross-border transactions, so borrowers need to be carefully evaluated to determine their remittance ability (especially in China). Investors must also have a deep understanding of withholding tax and regional tax agreements.
In some areas (such as the implementation of ECB standards in India), international financing providers are still restricted in using high-yield financial instruments, and financing providers must carefully evaluate some restrictions.
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