Redeemable preferred stock equity, with warrants or conversion rights, is also a type of mezzanine financing.
In compensation for the increased risk, mezzanine debt holders require a higher return for their investment than secured or more senior lenders.
Arrangement fees contribute the least return, and their purposes are primarily to cover administrative costs or as an incentive to complete the transaction.
As a result, by using equity ownership and PIK interest, the mezzanine lender effectively defers its compensation until the due date of the security or a change of control of the company.
In leveraged buyouts, mezzanine capital is used in conjunction with other securities to fund the purchase price of the company being acquired.