On the lending end of mezzanine financing is the mezzanine debt fund. This is a fund that is created by the lending of funds to various business sectors. The fund is sustained by the interest accrued from mezzanine loan interest payments, called debt assets. These funds are then loaned to other borrowers effectively creating a compound income stream.
Mezzanine debt funds are targeted for businesses with potential for expansion as well as those with strong rudiments. Some of the investments that mezzanine debt funds are used to finance include:
· Cash needed to acquire expansion modules or diversify current investments.
· Corporate buy out or buy in opportunities.
· Financial reorganization.
· Critical mass increases of the business, especially in the latter stages of development.
· Required cash or funds to facilitate growth/expansion into new markets.
The driving force behind mezzanine debt funds is to drive a higher return on investment (ROI). Generally, this is targeted for the middle to longer term and aims for a specific standard above the norm. For instance, one particular fund has a standard return focus of standard rates plus 3.5%. That constitutes a significant ROI for the lender and allows their mezzanine debt fund to continue to grow and increase at a high rate.
Like any if this type of cash loan, the interest or finance fees are high. There is no collateral required, so loans made from the mezzanine debt fund are completely unsecured. In general, the finance rates are in the neighborhood of 2% to 2.5% per month or as high as a standard rate of 20% to 30% based on the amortized principal each month.
Because of the nature of mezzanine debt funds (no collateral, high interest, involved risk), they are typically considered for businesses that accept a certain amount of risk while maintaining ROI into the longer terms. Borrowers that fail to repay the debts incurred will be risking the possibility of losing ownership of the company. Alternatively, the lender may also stake claims to stocks, assets or other company holdings in the case of borrower default.
Mezzanine debt fund lenders may incur repayment options at their discretion. Terms of the loans are usually negotiable and can include automatic share transfer or state that a portion of the company will become the property of the lender at the end of the stated term. This is why mezzanine debt funds are risk centric and interest rich.