Definition - What does Mezzanine Fund mean?
A mezzanine fund is a pool of capital that invests in mezzanine debt opportunities such as capital for organic growth, acquisitions, recapitalizations or management buyouts. As a comparison, a private equity fund will provide capital to a company in the form of equity.
Mezzanine loans often give the mezzanine fund lender a chance to convert to equity if the agreed amount of the loan is not paid back within the stipulated time period or terms.
Divestopedia explains Mezzanine Fund
Mezzanine funds earn a return on investment in three ways: cash interest, equity ownership or interest that is payable in kind (PIK). Cash interest is an agreement where cash is paid back to the mezzanine fund in periodic installments. PIK is a form of interest that is not paid in cash, but added to the total balance of the principal, thereby increasing its value. The final form of interest is through equity ownership of a company at the end of the stipulated period or in the case of a default. Regardless of which type of return is chosen, mezzanine funds are targeting an overall return of investment between 13% - 25%.
Mezzanine funds often work with private equity groups and provide capital required to close leveraged buyout transactions. Mezzanine debt is the middle layer of capital that falls between secured senior debt and equity. This type of capital is usually not secured by assets, and is lent strictly based on a company's ability to repay the debt from free cash flow.
Mezzanine loans can often be convert to equity if the agreed amount of the loan is not paid back within the stipulated time period or terms. There is a reasonable protection for the fund in it investments unless the company itself files bankruptcy. Even in such a case, mezzanine fund holders get precedence over equity shareholders during the liquidation process.