Information for business owners on Mezzanine financing.

1. Trends and Issues in
Mezzanine Finance
Vantage Capital Advisors LLC
Updated February 18, 2010

2. Agenda
1. What Is Mezzanine Finance?
2. What Do Mezzanine Lenders Look For?

3. 1. What Is Mezzanine Finance?

4. Definition and Role of Mezzanine
Capital
Characteristics Applications
• Ownership Succession
 Medium Risk - Medium Return Capital
• Management Buyouts
• Growth Capital
 Appropriate for Private and Public Companies • Good Company - Bad Balance Sheet
• Consolidations and Roll-ups
 Applicable to Diverse Industry Sectors • Recapitalizations
• Going Private Transactions
 Longer-term, Fixed Rate Capital
Structure and Costs
 Flexible Transaction Structures • 18% to 25% Total Return Target
• 11% to 13% Current Coupon
• 5 Year Term is Typical
 Cash Flow Lending with Upside
• Equity Participation – e.g. Warrants
• Registration Rights; Put Rights
 Subordinated Debt w/ Equity Kicker • Junior Security Interest
• Board Observation Rights

5. Definition and Role of Mezzanine
Capital
Senior Debt Mezzanine Debt Private Equity
Typical Structure Revolving Debt Debt with Warrants Preferred Stock
Investment Horizon Short Term Long Term Long Term
Risk Tolerance Low Medium High
Return Expectation < 10% 18-25% 35% ++
Current Coupon Floating Rate Fixed Rate n/a
Hidden Costs Personal Guarantees None Loss of Control
Customization Ability Rigid Standards Flexible Standards Flexible Standards
Seniority/Security Senior Lien Junior Lien Unsecured
Equity Dilution None Low High

6. Industry Comparative Returns
Fund Type 1 Yr 3 Yr 5 Yr 10 Yr 20 Yr
Venture -20.9 4.2 6.4 15.5 17.0
Buyouts -8.2 7.2 12.2 7.3 11.2
Mezzanine 10.5 4.4 4.8 5.4 7.9
All Private -6.5 7.8 11.2 9.4 12.9
Equity
Thomson Reuters' US Private Equity Performance Index (PEPI)
Investment Horizon Performance through 12/31/2008

7. Trends in the Mezzanine Market
• Decrease in lending multiples
and associated buyout multiples
• Buyers Market & Lenders Market
• Mezzanine is a dynamic market;
always shifting mix of providers $7-$10+ million mezzanine
transaction market very
competitive
• Investment banker auctions
• Interest only deals
• Capital as commodity
• Two-tier market
<$5 million mezzanine
transaction market still
underserved
• Deal structures and rates fairly
stable
• Limited number of firms

8. Applications for Mezzanine Capital
• Ownership Succession
• Management Buyouts
• Growth Capital
• Good Company - Bad Balance Sheet
• Consolidations and Roll-ups
• Recapitalizations
• Going Private Transactions

9. 2. What Do Mezzanine Lenders
Look For?

10. Criteria Lenders Look For
• Management and Markets
• Clear Value Proposition
• Proprietary, Unfair Competitive Advantages
• Discernible Inflection Points
• Measurable Milestones
• Alignment of Interests
• Congruity, Integrity, Discipline

11. Criteria Lenders Look For
• Invest alongside management with skin in the game
• Bet on the jockey, not the horse
• Specialize in small management buyouts
• Use active board observation rights
• Employ security rights; put rights
• Avoid companies with large senior debt burden
• Require accounting depth and systems resources
• Prefer lead position
• Fund sponsored and un-sponsored transactions

12. The Cost of Mezzanine Capital
• Medium Risk - Medium Return Capital
• Current Interest: 11% to 14% range
• Equity Participation: Equity stake of 5% to 25% is typical
• Total Return Expectation of 20% to 25%
• Requirements of an Institutional Investor: Documentation,
covenants, communication, liquidity

13. Deal Structure Considerations
• Array of Hybrid Instruments
• Subordinated debt with warrants
• Investment Term of 1 to 5+ years
• PIK to hold down current cash requirement & boost yield to risk appropriate
rate
• Equity Kicker with Put Rights
• Board Observation Rights
• Security Interest; Registration Rights
• Intercreditor and Subordination Issues
• Exit Imperatives and Put Rights

14. For more info
Vantage Capital Advisors LLC maintains relationships with mezzanine lenders
throughout the United States.
If you would like to determine if mezzanine financing is appropriate for your
company, please contact:
Russell Murphy
Managing Member
Vantage Capital Advisors LLC
rmurphy@vantagecapital.com
Tel: (415) 230 0005
efax (415) 869 3727

15. Trends and Issues in Mezzanine Finance
Vantage Capital Advisors LLC
Updated February 18, 2010