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Mezzanine funding explained

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What is mezzanine funding?

Mezzanine funding is a cross between the two traditional ways of sponsoring a project:

  • Debt financing – money is borrowed from a lender and paid back over an agreed period of time in addition to interest. Examples of debt financing include mortgages, secured and business loans.
  • Equity financing – the borrower sells shares (equity) in their company in order to raise money.

 

How does mezzanine funding work?

This will depend on how the contract is set out. As a hybrid of debt and equity financing, mezzanine funding combines features of both.

For example, in some arrangements, investors are paid back through profits in addition to regular interest payments. If the original loan can’t be paid back in full, the value of the loan may transfer into an equity share – giving investors a stake in the business itself.

 

Why would businesses use mezzanine funding over debt or equity?

Mezzanine financing is an innovative way to raise funds based on anticipated future profits. In other words, it means businesses can raise the cash it needs now without immediately selling off ownership through shares. Instead, investment is received on the promise of potential earnings. With this in mind, mezzanine financing is often used to fund building projects where the profits won’t be realised until the properties are sold.

Another advantage is that businesses can set out their own terms and conditions of repayment and have greater control over the arrangement. This makes mezzanine funding an attractive option over traditional lenders (like banks) who have their own terms driven by their own needs and priorities (which may not suit the business).

 

What are the pros and cons of mezzanine funding?

Outlined below are just some of the benefits and drawbacks of mezzanine funding. Remember that all investments come with risk, and professional advice should be sought prior to making any financial commitments. (The following lists are not exhaustive)

 

Mezzanine funding pros:

  • Flexible repayment structures designed to suit business needs.
  • Businesses can retain control so long as profits are realised.
  • Investors receive interest payments which are often higher than traditional savings platforms (for example, ISAs).
  • An opportunity for lenders to invest in sectors they may not otherwise have access to.

 

Mezzanine funding cons:

  • No guarantee that expected profits will be realised leaving investors with potentially illiquid shares.
  • Businesses could lose control if investors cannot be paid back and funds are converted into an equity share.
  • Conditions to invest may be restrictive and investors may need to commit a minimum sum.
  • Higher levels of interest can mean it’s an expensive way for businesses to fund projects.

 

Does mezzanine funding replace other types of funding?

No, mezzanine funding doesn’t replace traditional funding methods. It’s predominantly used to raise extra capital if businesses can’t otherwise get the financing they need.

It’s also an innovative way to increase the working budget of a project at short notice with the extra funding used to maximise potential returns. For example, to increase a building’s specification in order to create a more desirable and higher value property.

 

Mezzanine funding – in summary

Mezzanine funding is an innovative and flexible way for businesses to raise capital. It’s an especially effective method of financing one-off projects or raising additional funds. It’s a method that also enables businesses to retain control over their assets.

For an opportunity to contribute funding towards Acorn property, you must be a high net worth individual or a self-certified sophisticated investor. To find out more, contact us at investor.services@acornpg.org or speak to a member of the team on 0203 858 9881.

 

YOUR CAPITAL IS AT RISK IF YOU INVEST

Investment opportunities available via Acorn Property Invest are exclusively targeted at exempt investors who are experienced, knowledgeable and sophisticated enough to sufficiently understand the risks involved, and who are able to make their own decisions about suitability of those investment opportunities. All investors should seek an independent professional investment and tax advice before deciding to invest. Any historic performance of investment opportunities is NOT a guide or guarantee for future performance and any projections of future performance are not guaranteed. All investment opportunities available via Acorn Property Invest are NOT regulated by the Financial Conduct Authority (FCA) and you will NOT have access to Financial Services Compensation Scheme (FSCS) and may not have access to the Financial Ombudsman Service (FOS).

 

 

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The content of this page has not been approved by an authorised person within the meaning of the Financial Services and Markets Act 2000. Reliance on this promotion for the purposes of engaging in any investment activity may expose an individual to significant risk of losing all of the property or other assets involved.

This document is exempt from the general restriction in section 21 of the Financial Services and Markets Act 2000 on the communication of invitations or inducements to engage in investment activity on the ground that it is made to ‘investment professionals’ within the meaning of Article 19 of the Financial Services and Markets Act (Financial Promotion) Order 2005 (FinProm); persons believed on reasonable grounds to be ‘certified high net worth individuals’ within the meaning of Article 48 FinProm; persons who are ‘certified sophisticated investors’ within the meaning of Article 50 FinProm; and persons who are ‘self-certified sophisticated investors’ within the meaning of Article 50A FinProm. The attention of prospective Investors is drawn to the “RISK FACTORS” page of this website.