Mezzanine Finance for SGBs
WHY IT MATTERS
In the emerging and frontier market context, mezzanine finance refers to the range of investment structures that lie between pure equity and straight debt.
These instruments often have a hybrid structure, for example more debt like mezzanine instruments are partially uncollaterized and more flexible than straight debt. The investor can retain some potential for upside benefits on exit. The more equity-like mezzanine instruments will have equity features, moderated by a self-liquidating mechanism.
Why is Mezzanine Finance important?
Mezzanine Finance provides access to more flexible and customized financing solutions to SGBs that operate in “bread and butter” industries typified by modest growth trajectories such as agribusiness and manufacturing. These SGBs would in some cases be considered too risky by traditional bank lenders, or if they are offered debt it is at a high interest rate and comes with onerous collateral requirements. Similarly, equity financing may not be ideal for both the SGB or potential investors as the exit prospects are unclear.
In these instances, mezzanine instruments enable these companies to obtain capital that is more flexible, allowing both investors and SGBs to better adapt to the needs and constraints of each context.
PROGRESS TO DATE
While the use of mezzanine finance instruments has been increasing over the last decade, there is considerable scope for expansion. The eight largest emerging markets SGB-focused mezzanine funds globally manage only $1.2 billion.
Established organizations like Grofin and BPI, who have been deploying mezzanine finance instruments for many years, have achieved promising results. Other firms, like Adobe Capital and Alpha Mundi, both of whom have recently entered the space, have launched mezzanine finance funds in Latin America and Central Africa respectively. Beyond that, a number of equity investors are considering mezzanine for companies that may not be a fit for straight equity.