Capital Acquisition Opportunities for Middle Market Companies

August 15, 2019

Middle market companies (defined as those with a market cap of $10 million to $500 million) have the same pathways to capital as their larger counterparts.

Capital acquisition can happen in one of two ways: borrowing (debt) or selling (equity). More succinctly, companies can choose to go to the public markets and raise capital for growth, development and expansion or issue debt in the form of bonds.

What Is Mezzanine Financing?

Mezzanine financing is a way to raise capital that involves the creation of capital not secured by the company’s assets but based on the ability to pay back the debt through a strong and steady flow of cash.

Here’s how it works, simply: a middle market company identifies a capital need and seeks financing to meet that need. An investment bank structures a debt program, involving the issuance of junior or subordinate debt, based on the current and projected ongoing cash flow of the company. An amount at or near what is desired to the company is made available for use. Repayment of the “loan” takes place according to the terms of the loan worked out between the lender (investment bank) and the borrower (company).

Why Use Mezzanine Financing?

Mezzanine financing may be a useful option for a middle market company looking to leverage a strong financial position. An advantage of this type of capital acquisition is that it doesn’t require a company to dilute the ownership percentage of shareholders by issuing additional shares of stock.

Another reason why your company may want to use mezzanine financing is it provides a quick route to needed funds that can be used in a variety of ways, including a management or leveraged buy-out (MBO, LBO), acquisition of a similar company, recapitalization or pledged specifically for use with a program or project of the company.

Why Consider Other Forms of Financing?

It is more costly to raise funds through mezzanine financing than it is to simply issue bonds, which would constitute senior debt (as mezzanine debt is subordinated, unsecured debt). It is not as costly an option as issuing equity, but it comes generally at a cost of 12 to 25 percent. Subordinated debt also creates a risk for this type of debt holder as their priority in the line of repayment (in the case of a bankruptcy) is below that of senior bondholders.

Weighing the Pros and Cons

A key to mezzanine financing is the strong and consistent cash flow performance of the company. A cash flow analysis will provide the lender, typically an investment banking firm, with a good insight on the company’s financial strength and the appropriateness of mezzanine financing as a fundraising option.

Talk to a trusted and experienced investment banker to understand the finer nuances of this type of financing and how it can affect your company.

Working with Scott-Macon New York

We’ve been in the investment banking business for the past four decades. Formed in 1973, the firm specializes in raising capital for companies in the range of $10 to $500 million, and we’re located in the heart of New York’s financial district.

Scott-Macon is a leader in the area of mezzanine financing and other forms of capital acquisition for middle market companies, with the expertise and proven experience that can be trusted.

Our senior managers take a consultative approach when working with their client to determine their financing needs and the best approach to meeting them. Whether its mezzanine financing or other forms of corporate financing, we’ve developed a specialty with middle market companies and are well positioned to meet their financing needs.

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