Mezzanine fund
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A type of Private Equity, or Merchant Banking Fund.
A typical mezzanine investment consists of a debt or debt-like instrument, paired with an equity “sweetener.” The equity component of the investment gives the mezzanine lender upside potential, while the debt component -- which generates steady interest payments and ranks senior to the company's common stock -- provides a measure of downside risk protection. The most common formulation is a note which may provide for both current-pay cash interest and pay-in-kind, or PIK, interest, paired with warrants to acquire stock of the borrower. Mezzanine investments can be made using other types of securities as well, such as with preferred stock in place of a debt instrument.
Difference between Mezzanine Fund, and Typical Private Equity Fund
With a typical private equity fund, sometimes called a "buyout fund", returns on the fund's investments are only realized when the investments are sold. This entails no steady cash flow to investors. Since mezzanine funds contain debt, or debt-like instruments, those receiving the capital investment are compelled to make interest payments, therefore generating significant current income for investors.
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