The Emerging Markets Private Equity Association (EMPEA) looks at mezzanine as a financing option for small- and medium-size companies that offers fewer restrictions than pure debt and less ownership dilution than pure equity.
Access to finance is one of the most prevalent challenges facing countless entrepreneurs and business owners across the emerging markets. Local banks have traditionally focused their lending on only a handful of large companies –in part, because they view smaller firms as having insufficient assets or collateral- while the global financial crisis and subsequent induction of new capital adequacy requirements have resulted in many of the international banks scaling back their emerging market activities in recent years.
Even when bank debt is available, it is often short term in nature and does not provide the type of patient capital small- and medium-size companies need to grow. While private equity is one viable option to bridge this gap, entrepreneurs are sometimes hesitant to go this route due to a reluctance to give up equity in their companies. In such cases, another alternative exists: mezzanine financing.