What does mezzanine finance typically involve?

Mezzanine finance typically involves a combination of debt and equity financing. This approach is commonly used by companies to bridge the gap between senior debt (which is secured) and equity financing. In mezzanine financing, the investor provides capital that is usually structured as debt but has equity-like features, such as convertible debt or warrants that allow the investor to convert the debt into equity under certain conditions.

This mix offers companies the benefits of debt financing, such as lower immediate cost compared to pure equity, while also providing investors with the potential for higher returns through the equity component if the company performs well. Mezzanine finance is especially popular in leveraged buyouts or growth financing where companies may not want to dilute existing equity ownership significantly while still needing substantial funding.

The other options focus on different financing structures: pure equity investments involve ownership stakes without debt instruments, government grants are funds given by the government that do not require repayment, and equity-only investments do not incorporate debt components, differing significantly from the hybrid nature of mezzanine finance.