Mezzanine financing presents an attractive solution for project sponsors to bridge the funding gap between equity capital (made available mostly by local sponsors) and senior bank debt (that requires a certain amount of equity in the capital structure) without suffering the permanent dilution and loss of control caused by a third party straight equity investment.

Besides taking control during the holding period, traditional private equity usually forces trade sales by the end of their holding period in order to seek its own exit from the investment, thus passing along control to a new investor and sometimes even taking the business away from the family owners through “drag along” provisions.   In addition, negotiations and structuring of traditional private equity transactions are complicated given disparities in entry price valuations.

Mezzanine financing provided by LAP’s Funds is therefore a more palatable alternative for the Fund’s target companies in this region, which often are family owned companies with good growth opportunities that require mezzanine or equity  funding but  resist third party equity financing due to its negative effects. Mezzanine financing provides an adequate solution to temporary capital requirements, resulting in temporary impact on returns and control versus traditional private equity’s permanent impact on the company and its shareholders.

Key benefits of mezzanine include:

• Cheaper than equity and lower that equity returns

• Source of financing when senior debt is insufficient

• Aligned with sponsor due to expected upside with support company’s growth

• Less restrictive and less demanding than senior debt in initial years.

• Reduces need for equity

• Interests, equity kickers  and other additional compensation is typically tax efficient for companies as it is tax deductible

• Avoids permanent loss of control and dilution caused by traditional PE