Mezzanine financing occupies the middle layer of a company's capital structure — ranking below senior secured debt (which has first claim on assets) but above common equity. It is typically structured as subordinated debt with warrants or an equity conversion option, compensating lenders for their higher risk position through higher interest rates (typically 10–20%) and equity upside.
Mezz debt is commonly used in leveraged buyouts to bridge the gap between senior debt capacity and available equity, allowing PE sponsors to increase leverage and reduce the equity they must commit. It is also used by growing companies seeking patient capital that avoids immediate equity dilution. In Southeast Asia, mezzanine financing is increasingly offered by specialist private credit funds filling a gap left by conservative regional banks.