Two ways to fill the gap between senior debt and common equity — and how they differ.
Mezzanine debt is subordinated borrowing that ranks below senior debt but above equity, repaid on a schedule and often carrying PIK interest or warrants. Preferred equity is an ownership interest that ranks ahead of common equity with a preferred return. Both bridge the gap to equity; the choice affects priority, security, control and accounting.
| Factor | Mezzanine debt | Preferred equity |
|---|---|---|
| Nature | Debt (subordinated) | Equity (senior to common) |
| Rank | Below senior debt, above equity | Below all debt, above common equity |
| Return | Interest (often incl. PIK) | Preferred return / dividend |
| Security | Sometimes second-lien | Typically unsecured, with rights |
| Control | Lender-style protections | Equity-style protections |
| Typical use | Leverage to a defined point | Growth/gap capital, JV structures |
Working on a preferred equity / mezzanine debt mandate? WhatsApp a partner →
Consider repayment profile, security, control rights and how each is treated by senior lenders and on the balance sheet. See mezzanine debt and preferred equity.
Mezzanine is subordinated debt repaid on a schedule; preferred equity is an ownership interest with a preferred return. One is a liability, the other equity.
Mezzanine debt generally ranks ahead of preferred equity, which in turn ranks ahead of common equity.
Yes. Some capital stacks layer mezzanine above preferred equity, with mezzanine ranking ahead. The combination is negotiated with senior lenders, since each additional layer affects covenants, inter-creditor terms and how much cash flow remains available to service the debt.
Preferred equity is the more common JV instrument: it adds capital with a priority return without further debt or covenants, sitting naturally alongside a partner’s common equity. Mezzanine suits sponsors adding leverage where project cash flows can service the interest.
Senior lenders generally treat preferred equity as equity, outside the debt stack, while mezzanine is debt that requires inter-creditor arrangements, subordination and agreed limits on junior enforcement. That difference often determines which instrument a senior facility will accommodate.
Speak to a partner about how this applies to your transaction. A partner responds personally, typically within one business day.
