Let’s start with a definition.
mez·za·nine
/ˈmezəˌnēn, ˌmezəˈnēn/
adjective
1. relating to or denoting unsecured, higher-yielding loans that are subordinate to bank loans and secured loans but rank above equity.
As the definition indicates, mezzanine capital has historically been understood to mean subordinated debt that resides between the senior debt and equity on the balance sheet, hence the name mezzanine, a word that evolved from the Latin for “in the middle”. Junior capital in comparison is a much broader term than mezzanine and encompasses subordinated debt as well as preferred and common equity. However, in recent years, the term “mezzanine capital” within the corporate finance industry has evolved somewhat to include equity components, so that it is sometimes used interchangeably with junior capital. Peninsula Capital Partners played a key role in this evolution as we were a pioneer in redefining and expanding how mezzanine capital is used and structured in the private capital industry. We are immensely proud of the role we have played in transforming mezzanine capital into a more flexible, customizable and useful tool within the transactional finance industry, and of the well over one hundred investments we have completed since our founding in 1995. The following is a brief explanation of mezzanine capital’s past and present.
The “Old” Days. As mentioned, not so long ago mezzanine capital was simply another name for subordinated debt, which was almost exclusively used by buyout funds to help finance their acquisitions. Mezzanine capital providers were limited to providing capital to transactions originated by buyout funds. Generally speaking, mezzanine investors did not in the normal course of their business consider opportunities to invest in companies unless a buyout fund was involved. This investment preference for a buyout fund sponsor in each deal is why such mezzanine providers are often referred to as “sponsored mezzanine investors”. Although reliable statistics are not available, it is widely believed the vast majority of mezzanine investments were of this variety until the first “non-sponsored mezzanine investors” began entering the marketplace in the mid-1990’s.
The Mezzanine Market Evolves. Despite a well-established mezzanine capital market focused on providing funding to sponsored buyout transactions, some investment professionals recognized that a large demand for mezzanine capital to support non-sponsored transactions (i.e., transactions without a buyout fund sponsor) was not being adequately addressed by the market. Unlike traditional sponsored buyout deals that involve a third-party sponsor acquiring a controlling interest in a company, these non-sponsored transactions include a wider range of deal types, such as recapitalizations, management buyouts, strategic acquisitions, special dividends, stock buybacks, growth capital infusions and independent sponsor deals. The founders of Peninsula Capital Partners were among the very first firms to recognize this market opportunity, and thus founded the company with the mission of servicing this market niche.
The Mezzanine Market Today. The current mezzanine market can best be described as trifurcated, with the majority of mezzanine capital providers still focused on supporting sponsored buyout transactions. A number of mezzanine firms have broadened their investment scope to include sponsored and non-sponsored opportunities. An even smaller number of firms have specialized exclusively, or nearly exclusively, in non-sponsored mezzanine investing. Peninsula Capital Partners is one of these non-sponsored specialist firms, and is rare in that it was established with the goal of providing mezzanine capital to non-sponsored transactions and has remained true to that mission ever since, building a track record of such deals that can be matched by very few other junior capital investors. Despite the evolution and broadening of the term “mezzanine capital”, Peninsula Capital Partners prefers to refer to itself as a “junior capital” investor to underscore our ability to consider and close a wide range of transactions, provide both subordinated debt and equity capital, and act as either a non-control or control investor. This degree of flexibility is truly rare in the private capital industry.
