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This finance sits between the debt and equity in a project. Cake Investment Group may have a fixed rate on it but will have some participation in the profit of an asset, and/or the right to convert into equity.
Going concerns who do not have the equity required to complete a project.
Mezzanine finance is typically used when the buyer/owner of an operation does not have the required equity to complete a project or business expansion, or one of the earlier round investors pulls out at the last minute, leaving an equity gap.
e.g., If the investor wants to buy a $10m building and the lender will advance $7m, the buyer needs $3m. If they only have $2m, they could seek to use $1m in Mezzanine finance, to obtain the $3m required.
Going concerns who have a viable business, as evaluated by Cake Investment Group.
Cake Investment Group is very much a partner with the operators, and hence will look at the project and the track record/competency of the business and its management.
As the Mezzanine finance would not be required if the concern had the required equity, the Cake Investment Group is aware of the circumstances of the business.
The amount of mezzanine finance advanced by Cake Investment Group depends upon the economics of the project, the risk tolerance at the time, based on current market conditions and the shortfall between that equity the business has and what is required to secure the debt financing.
If the short fall is less than the amount that Cake Investment Group is comfortable with then finance can be advanced.
A typical project might require 30% equity and Cake Investment Group might contribute up to 15% equity with the operator investing the other 15%.
As the mezzanine finance has the risk profile of equity, the due diligence is done on the values of the projects and the longer-term potential of the project.
The operator will need to obtain consent from the debt lender to use mezzanine.
However, the lender is typically happy for the owner to use mezzanine finance, if it does not alter or breach any of the ratios required for the lender to advance the funds.
Once it is confirmed that the owner can use mezzanine the Cake Investment group will undertake their financial assessment to determine if they wish to make the investment.
This is usually a fast process
Mezzanine Finance is an equity instrument that typically has an interest rate attached to it.
The project will pay the main debt lender first, and then pay the interest due to Cake Investment Group.
The interest on the finance will vary depending upon the provider and the project but might be between 4% and 12%.
Once the due diligence is done and the terms agreed the Mezzanine finance is funded along with the equity.
The total equity is then used with the debt to fund the project.
The Debt lender will have a first charge in the property and Cake Investment Group will have a second charge.
The mezzanine finance will remain in place and accrue interest until such time as the concern or subunit is sold, the business secures funds to buy out the Cake Investment Group mezzanine finance or the operator refinances the debt and is able to use these proceeds to buy out Cake Investment Group.
Should the business or subunit be sold, the lender is paid off first, then Cake Investment Group is paid off (including any profit participation) and then the equity owner is paid. Mezzanine finance can either be used as a replacement for equity or to allow a concern to make a more expensive investment and make a greater potential profit.
- Saves a project from failing.
A concern may have spent a lot of time and money on a project that is a viable and a potentially profitable venture. Circumstances may change and leave the financing of the project short.
This might be due another investor withdrawing their funds, the lender making a last-minute change, the lender dropping out and a new lender offering less favorable ratios or the operator having to make an improved bid to secure the deal. In these circumstances, rather than walk away from the project, the use of Cake Investment Group mezzanine finance allows the operator to complete the project.
- Operator can undertake bigger projects and make more profit.
An operator may have limited capital and the size of the projects they can undertake is constrained. By partnering with a Cake Investment Group, they can increase the size of potential project.
e.g., If the investor has $3m and lenders will lend 70% of the cost, then the maximum size is $10m. If Cake Investment group will match the $3m by taking on 15% of the equity in a project, then the equity will increase to $6m and potential project size increases to $20m.
- Investor can spread risk.
By utilizing Cake Investment Group, the concern can spread their equity over more projects. In the example above the investor can then invest in 2 $10 Million projects to one $20m project.