Mezzanine fund is a private capital fund focused on providing mezzanine-layer financing—subordinated debt with equity participation—to middle-market and buyout transactions.

How it works

Mezzanine funds raise commitments from institutional LPs seeking returns between senior credit and private equity. They deploy into:

• LBOs alongside PE sponsors
• Dividend recaps and growth acquisitions
• Recapitalizations of profitable companies

Return targets often land in low-to-mid teens IRR through current pay interest, PIK, fees, and warrant gains. Funds may hold until refinancing or sale rather than ten-year venture holds.

Unlike VC funds, mezzanine funds underwrite cash-flow coverage and covenant packages, not just TAM stories. They participate in creditor committees when companies stumble.

Why it matters

• Founders: If your company joins a PE platform, mezzanine may sit in the capital stack below senior bank debt. Refi or sale must clear mezz claims.
• Investors: PE sponsors use mezz to optimize equity returns—more leverage means higher risk-adjusted equity IRR if operations deliver.

Common mistake

Confusing mezzanine funds with venture debt providers at seed stage. Mezzanine scale and pricing assume mature cash generation or sponsor-backed credit support.

Related ideas

See also mezzanine debt, mezzanine financing, buyout firm, and leveraged buyout (LBO).