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Mezzanine
- 1. Trends and Issuesin Mezzanine Finance Vantage Capital Advisors LLC Updated February 18, 2010
- 2. Agenda 1. What IsMezzanine Finance? 2. What Do Mezzanine Lenders Look For?
- 3. 1. What IsMezzanine Finance?
- 4. Definition and Roleof Mezzanine Capital Characteristics Applications • Ownership Succession Medium Risk - Medium Return Capital • Management Buyouts • Growth Capital Appropriate for Private and Public Companies • Good Company - Bad Balance Sheet • Consolidations and Roll-ups Applicable to Diverse Industry Sectors • Recapitalizations • Going Private Transactions Longer-term, Fixed Rate Capital Structure and Costs Flexible Transaction Structures • 18% to 25% Total Return Target • 11% to 13% Current Coupon • 5 Year Term is Typical Cash Flow Lending with Upside • Equity Participation – e.g. Warrants • Registration Rights; Put Rights Subordinated Debt w/ Equity Kicker • Junior Security Interest • Board Observation Rights
- 5. Definition and Roleof Mezzanine Capital Senior Debt Mezzanine Debt Private Equity Typical Structure Revolving Debt Debt with Warrants Preferred Stock Investment Horizon Short Term Long Term Long Term Risk Tolerance Low Medium High Return Expectation < 10% 18-25% 35% ++ Current Coupon Floating Rate Fixed Rate n/a Hidden Costs Personal Guarantees None Loss of Control Customization Ability Rigid Standards Flexible Standards Flexible Standards Seniority/Security Senior Lien Junior Lien Unsecured Equity Dilution None Low High
- 6. Industry Comparative Returns FundType 1 Yr 3 Yr 5 Yr 10 Yr 20 Yr Venture -20.9 4.2 6.4 15.5 17.0 Buyouts -8.2 7.2 12.2 7.3 11.2 Mezzanine 10.5 4.4 4.8 5.4 7.9 All Private -6.5 7.8 11.2 9.4 12.9 Equity Thomson Reuters' US Private Equity Performance Index (PEPI) Investment Horizon Performance through 12/31/2008
- 7. Trends in theMezzanine Market • Decrease in lending multiples and associated buyout multiples • Buyers Market & Lenders Market • Mezzanine is a dynamic market; always shifting mix of providers $7-$10+ million mezzanine transaction market very competitive • Investment banker auctions • Interest only deals • Capital as commodity • Two-tier market <$5 million mezzanine transaction market still underserved • Deal structures and rates fairly stable • Limited number of firms
- 8. Applications for MezzanineCapital • Ownership Succession • Management Buyouts • Growth Capital • Good Company - Bad Balance Sheet • Consolidations and Roll-ups • Recapitalizations • Going Private Transactions
- 9. 2. What DoMezzanine Lenders Look For?
- 10. Criteria Lenders LookFor • Management and Markets • Clear Value Proposition • Proprietary, Unfair Competitive Advantages • Discernible Inflection Points • Measurable Milestones • Alignment of Interests • Congruity, Integrity, Discipline
- 11. Criteria Lenders LookFor • Invest alongside management with skin in the game • Bet on the jockey, not the horse • Specialize in small management buyouts • Use active board observation rights • Employ security rights; put rights • Avoid companies with large senior debt burden • Require accounting depth and systems resources • Prefer lead position • Fund sponsored and un-sponsored transactions
- 12. The Cost ofMezzanine Capital • Medium Risk - Medium Return Capital • Current Interest: 11% to 14% range • Equity Participation: Equity stake of 5% to 25% is typical • Total Return Expectation of 20% to 25% • Requirements of an Institutional Investor: Documentation, covenants, communication, liquidity
- 13. Deal Structure Considerations • Array of Hybrid Instruments • Subordinated debt with warrants • Investment Term of 1 to 5+ years • PIK to hold down current cash requirement & boost yield to risk appropriate rate • Equity Kicker with Put Rights • Board Observation Rights • Security Interest; Registration Rights • Intercreditor and Subordination Issues • Exit Imperatives and Put Rights
- 14. For more info VantageCapital Advisors LLC maintains relationships with mezzanine lenders throughout the United States. If you would like to determine if mezzanine financing is appropriate for your company, please contact: Russell Murphy Managing Member Vantage Capital Advisors LLC rmurphy@vantagecapital.com Tel: (415) 230 0005 efax (415) 869 3727
- 15. Trends and Issuesin Mezzanine Finance Vantage Capital Advisors LLC Updated February 18, 2010