I. Introduction

Acquisitions can be exhilarating, but they can also be complex, especially when it comes to financing them. Two common financing options are growth equity and mezzanine capital. But which one is right for your acquisition? This post explores the differences between the two and provides recent real-world examples to guide your decision-making.

II. Understanding Growth Equity

A. What is Growth Equity?

Growth equity is a type of private equity investment usually made in relatively mature companies that are looking to scale operations or enter new markets. It's typically structured as preferred equity, though it can sometimes involve common equity or convertible debt.

B. Pros and Cons of Growth Equity

Growth equity can give a company the resources it needs to scale quickly. It's less risky than using debt, as there's no requirement to make repayments if the business doesn't perform well. However, in return for this investment, shareholders may have to give up a significant portion of their equity.

C. Real-World Example: Uber and Softbank

An example of a growth equity investment is Softbank's investment in Uber in 2018. The deal, which saw Softbank invest $7.7 billion for a 15% stake, provided Uber with the resources it needed to expand into new markets and continue developing its autonomous vehicle technology1.

III. Understanding Mezzanine Capital

A. What is Mezzanine Capital?

Mezzanine capital is a hybrid form of financing that combines elements of debt and equity. It often takes the form of a loan that can be converted into equity if the loan is not paid back on time and in full.

B. Pros and Cons of Mezzanine Capital

Mezzanine capital can provide significant capital without diluting ownership as much as growth equity would. However, it's more risky than growth equity, as it must be repaid within a set timeframe, typically with high interest. If the business can't make repayments, lenders could convert their loan into an ownership or equity interest.

C. Real-World Example: American Seafoods and Bregal Partners

A recent example of mezzanine financing is Bregal Partner's investment in American Seafoods in 2020. Bregal provided mezzanine debt to support the company's operational and growth needs2.

IV. Which is Right for Your Acquisition?

The choice between growth equity and mezzanine capital depends on your company's situation. Growth equity might be a good choice if you're willing to give up a larger equity stake for less risk, while mezzanine capital might be suitable if you're confident in your ability to repay the loan and want to minimize equity dilution.

V. Conclusion

Acquisition financing is a complex decision that depends on numerous factors. Both growth equity and mezzanine capital have their merits, and the right choice depends on the specific circumstances of the acquisition and the company's financial situation.