AlexGore 1/27/00 10:16 pm
As your typical VC fund gets larger and larger, more of them are invading the mezzanine zone where you can put more money into play on a single deal. TA Associates, Technology Crossover Partners (Jay Hoag's firm), SilverLake Partners (Roger McNamee's new firm) are examples.
You can also tell by the location and bios of the staff what a firm is. A VC firm is going to be in a tech center (Silicon Valley, Boston, Seattle or Austin), and the others will generally be in the financial centers. A VC firm will have lots of people with heavy tech-operating experience, a lawyer from Wilson Sonsini or Cooley (tech law firms in the Valley), and some ibankers. Mezzy / High Yield firms will have mostly or entirely financial types (and no former CEOs of business software companies or semiconductor equipment makers). LBO firms will be in a financial center and have a mix of ibankers from premier M&A operations and lawyers from Wall Street firms (like Skadden or Shearman) and some operating executives, usually of the consumer goods or manufacturing variety.
Of course, these aren't hard and fast rules. KKR's office is up the hill from my own firm's on Sand Hill.
finance_professional 1/27/00 2:38 pm
Shane is right in saying that mezzanine financing is commonly seen in acquisitions and buyouts, and while I would not necessarily call it "bridge" financing, GWKenny does point out that there can be an "interim" financing aspect to mezzanine debt. (A mezzanine investor might expect to be taken out by an equity issuance, for instance). Mezzanine financing continues to evolve; an article in one of the industry rags (for the life of me I cannot remember which one--anyone else remember?) talks about how many uses we now see for mezzanine.
As others have pointed out to you, mezzanine refers to pieces that are inserted in the capital structure between Bank/Other Senior Debt and Equity (hence, the derivation of the term "mezzanine"). As Shane said, such financing often appears in the form of subordinated debt or preferred structures and usually contain some kind of equity upside component such as warrants or convert features. I have heard some people say that maturities range from five to 30 years, but my personal experience is that five-, seven- and ten is much more common.
Mezzanine funds are not private equity funds which are not LBO funds (per se) but a lot of the larger sized funds anyway seem to be playing in each other's back yards. In other words, it used to be more traditional for a private equity firm to play only in the equity of a Company's capital structure, but more often these days we are seeing buyside firms take pieces of as many parts of the capital structure as they can. That becomes useful in the event of something like a distressed event or bankruptcy, because the fund can then step to the negotiation table as a member of each relevant debt holder or shareholder tier.
How do you differentiate between the different firms, then? It still boils down to their investment strategies, which they disclose to their investors in their prospectuses. I think one distinguishing factor is the target return that the different types of funds seek. High yield investors seek IRRs in the low teens; mezzanine funds seek IRRs in the mid- to low- 20s, while private equity funds like for returns northwards of the mid-20s. Best Regards, Wayne
ShaneSr 1/26/00 11:58 pm
I'm familiar with mezzanine for financing acquisitions, not bridge loans. With acquisitions, it too is high yield debt, often issued with warrents and/or options - so it's a debt/equity hybrid. This is most commonly used by private equity groups to "fill in the gap" between the offer they made to the seller, the amount of debt they can get out of a bank or two, the equity that their fund is willing to put in, and the amount of note (if any) the seller is willing to carry. Shane gwkenny 1/26/00 11:05 pm
Mezzanine:
Where you see Mezzanine, think "interim". Almost always short-term high risk and therefore high yield financing. I have never heard the term applied to VC, but then, I'm not a VC type of guy.
Example: Making improvements on a lot of land (i.e.: building an office complex). You have everything set (the plans, zoning approvals, building contractors etc...) including your long-term financing. Long-term financing consists of Senior Debt of $250MM, and Subordinate debt of $50MM.
You have your long term financing, but they won't give you the money yet because you haven't built the asset and they are unwilling to assume construction risk. That's when you obtain mezzanine debt to cover your costs during build-up. When you satisfy the agreement for the long term financing (i.e. certificate of occupancy, XX% vacancy, etc...) then your long-term financing will kick-in, and you retire the $300 mezzanine debt.
That's an example of mezzanine financing. I've never heard of long-term mezzanine financing. Every example of mezzanine financing I've come across dealt with a (A) beginning state, (B) an expected final state and mezzanine financing taking you from point (a) to point (b). yadda yadda yadda
modeler2000 1/26/00 12:17 pm
i have some questions about nomenclature and mezzanine funds in general. please correct or confirm some observations i have made.
(1) one can have "mezzanine" DEBT, which is just a fancy word for sub-debt or high-yield debt, right? it gets the "mezzanine" name for its position in the cash waterfall - being in the middle or mezzanine level between senior debt and equity; am i correct on this too?
(2) also, one can have "mezzanine" FINANCING, which is the third stage/round of VC/growth stage financing, right?
(3) am i correct to say that "mezzanine" FUNDS are private equity funds that do what was stated in #2? they are not simply a fund that invests in #1, right?
www.investorwords.com and wasat.hbs.edu/vc/vc_jobs.html confirm #2, but www.americancapitalonline.com confirms #1. i am a little confused. which is the more common use of the term "mezzanine"? to describe debt or to describe a level of financing?
are mezzanine funds just late stage VC funds? please reply if you have any comments or
answers.