The term “mezzanine” comes originally from Italian “mezzanino”, which is a diminutive of “mezzano”, (meaning middle). This, in turn, comes from Latin “mediānus” (meaning in the middle). The idea of using word “mezzanine” in the world of finance seems to come from architecture. In architecture “mezzanine” means a low-ceilinged story between two main stories of a building, especially, an intermediate story that projects in the form of a balcony.
Tracking the origin of the usage of “mezzanine financing” term leads to two very interesting and informative sources. The first one is an article published in Forbes in 1984: “Luring Banks Overboard?” by Sloan. The article describes leveraged buyouts as “Wall Street’s equivalent of the philosophers’ stone, that mythical substance that turned ordinary metal into gold [which] have produced payoffs as large as 200-to-1 for some happy investors.” The second source is “Mezzanine Money for Smaller Businesses” from Harvard Business Review, 1987, by William J. Torpey and Jerry A. Viscione.
The phrase “mezzanine money”, which GE Credit coined in the late 1970s, describes money above the ground floor (the equity investors) but below the roof (the senior lenders).
Clearly, he refers to the usage of mezzanine as in the context of architecture to explain the concept of mezzanine financing. Also, as he points out that the term itself was created in the late 1970s, it explains why there are no earlier references to mezzanine in the field of finance in the published articles.
Torpey and Viscione give a bit different explanation of the origin of “mezzanine” term, but this on its own is not pinpointing the actual, so to say, birthplace:
The [mezzanine financing] term probably originated with venture capitalists in describing the round of financing for a young company between the time it received seed capital and its first public offering. Today the term refers to any private placement of medium-risk capital.
It is interesting to see that historically, mezzanine financing has been seen as having specific place in the life-cycle of a company. Here they indicate that it would be between VC funding stage and IPO. This still partially is a valid point, though not as strictly applied. Currently, mezzanine financing is also used by companies backed by late-stage VCs and by some listed companies.
The second sentence in the quote from HBR is maybe event more vital. We have to remember that the article is from 1987, yet it still gives a view that seems to be dominating until present day. Mezzanine financing is a medium-risk capital (as it is placed between senior debt and equity in the seniority ranking on a company balance sheet). Furthermore, mezzanine funding comes typically in the form of private placement. In fact, throughout the pages of our www.GetMezzanineFinancing.com site we focus around this meaning of “mezzanine financing” and provide best resource on the web for people who look for it.
Although the sources of mezzanine funds are usually from investors offering private lending and mezzanine debt is between senior debt and equity, these are a bit murky waters of mezzanine financing definition. In the past, and even still today, some people call “mezzanine” any type of funding that is hybrid (has mixed characteristics of both debt and equity). Furthermore, term “mezzanine” is also occasionally used to refer to debt instruments that have sub-investment grade credit rating. This includes also traded products like junk bonds. To add to that the more recently invented collateralized debt obligations (CDOs) and other types of structured asset-backed securities (ABS) refer to “medium-risk” tranches as “mezzanine”.
To conclude the discussion on the origin of mezzanine financing term it is useful to re-focus again and, for some, clarify that the primary interest of Get Mezzanine Financing is on private subordinated credit provided in the form of mezzanine capital to middle-market companies. If you are just starting to learn about mezzanine financing, we’d recommend visiting our Get Mezzanine Financing introductory page.