Private credit and mezzanine

What this seat actually does

These lenders fill the space between what a senior lender will advance and the total price, without requiring you to give up as much ownership as an equity partner would. The capital is subordinated, so it is priced higher, and it frequently carries some equity participation such as warrants.

Unitranche structures combine senior and junior into a single facility from one provider, which simplifies negotiation and intercreditor complexity, usually at a blended cost between the two.

When you need one

When the deal is sound but the senior lender will not stretch far enough, and you would rather pay for capital than sell ownership.

How they charge

Interest, often with a portion accruing rather than paid in cash, plus fees and frequently warrants. Model the fully loaded cost including any equity participation, because the headline coupon understates it.

What to ask before you hire

• What is the fully loaded cost including warrants or any equity participation, expressed as a single number?
• What are the covenants and how do they interact with the senior lender’s?
• What rights do you take if the business underperforms?
• How long does your diligence take, and what will you need?

How to compare candidates

• Compare fully loaded cost and control rights together. The cheaper paper with harsher rights is frequently the worse deal.
• Ask what they have done when a borrower underperformed. Their answer describes your future in a bad year.

The mistake owners make

Stacking junior debt to avoid dilution and building a structure with no room for a bad year. Revenue synergies are upside, never debt service.

What this is not

Not equity, though it often carries an equity feature. Not senior debt.

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