Mezzanine debt w/ equity co-invest for funded searchers

lender profile

January 19, 2022

by a lender from The University of Chicago - Booth School of Business in Omaha, NE, USA

Question for funded searchers - if you have already sourced your equity capital, are you (or your investors) willing to allow your lending partner to make an equity co-investment? If not, would a warrant be acceptable, or do funded searchers typically seek interest rate-only debt financing (i.e. no equity upside)?

We are a mezzanine debt and equity (SBIC) fund, but would generally prefer to have some form of equity upside in deals with sub-$3mm in EBITDA.

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commentor profile
Reply by a searcher
from University of Pennsylvania in Seattle, WA, USA
David, I was thinking more about this last night and I think the thing that didn't sit well with me was that it felt that by providing market rate mezz debt, there was some expectation/entitlement to get a piece of the equity upside. For the deal sizes that I am working on, when I am evaluating using mezz debt, it is for deals that are straining my ability to close based on my current equity investors. For those opportunities, something along the lines of what you proposed could be valuable. If you present the equity investment as a tool to help close these gaps rather than a kicker for providing the debt, it would sound more attractive to me.
commentor profile
Reply by a searcher
from University of Pennsylvania in Seattle, WA, USA
Personally, I am not interested in opening up extra equity investments as I look at acquisitions. I am trying to avoid seller equity rolls and only taking on value added equity investors as a last resort. After all the work to find a target, taking a PG on the debt, etc, I am trying to capture as much upside as possible. Are you expecting pari passu equity or would you be open to a different arrangement (common vs preferred for example)?
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