If you run credit at a mezzanine fund, you already know the shape of this problem. A sponsor or an intermediary brings you a company with real EBITDA, a defensible niche, and a genuine need for subordinated capital, and the need is $1.5M. Your minimum is $5M. The economics of your fund do not work on a check that size: the diligence cost is nearly identical, the monitoring burden is identical, and the fee load can’t carry it.

So the file gets declined. The question worth asking is what happens next, because it usually isn’t nothing.

The deals below your minimum don’t disappear

They go somewhere. Often somewhere expensive, occasionally somewhere that damages the company enough that it never becomes the borrower you would have wanted in three years. Sub-minimum subordinated needs typically land in one of a few places:

  • Stretch senior. The senior lender agrees to lever a bit further rather than bring in a second party, usually with tighter covenants.
  • Seller financing. In an acquisition context, the gap gets pushed back onto the seller as a note, which works until the seller won’t move.
  • Revenue-based financing or short-duration facilities. Fast, unsecured or lightly secured, and priced accordingly. Fine as a bridge, punishing as a permanent layer.
  • Personal capital. The owner writes the check, pledges the house, or takes on personal guarantees they haven’t fully priced.
  • Nothing. The acquisition dies, the expansion doesn’t happen, the company stays the size it was.

The last two outcomes are the ones that matter to a fund with a five-year horizon. A company that stalls at $2M EBITDA never becomes a $8M EBITDA platform that needs your check.

Why the graduating borrower is worth a relationship

The strategic argument for caring about sub-minimum deals is straightforward: the constraint is size, and size changes. A business that needs $1.5M of subordinated capital today, and gets it on sane terms, is a plausible candidate for a real mezzanine facility in two to four years. A business that gets it on punitive terms, or doesn’t get it at all, usually isn’t.

This is the same logic that makes declined-file referral relationships work elsewhere in the stack. Factors run into it constantly with deals that fail verification or breach concentration caps, and the shops that handle those declines well end up with a pipeline the ones who don’t never see.

What “handling the decline well” actually looks like

Most funds already do some version of this informally, an associate makes a call, forwards a name. The gap is that it’s ad hoc, undocumented, and dependent on whoever happened to take the meeting. A more deliberate version has a few properties:

  • The decline is fast and specific. “Below our minimum check” is useful information. “Not a fit at this time” is not, and the intermediary who brought it learns nothing.
  • The referral is warm and tracked. A name and an introduction, with a record that the file went somewhere, so the relationship with the referring party is preserved and measurable.
  • The structure is sane. Referring a company into something that over-levers it or loads it with personal guarantees doesn’t preserve a future borrower; it destroys one. If a bridge is the right answer, it should be priced and sized as a bridge, with a defined exit into permanent capital.
  • There’s a path back. The referring fund should hear when the company grows into their range.

The intermediary relationship is the real asset

Sponsors, investment banks, and independent sponsors don’t primarily remember which fund closed their deal. They remember which fund gave them a straight answer quickly and which one sat on a file for six weeks before passing. In a market where private credit has expanded into most of the middle market and differentiation on price alone is difficult, response quality is a durable edge.

A fund that reliably tells an intermediary “this is below us, here’s who can actually do it” gets shown the next deal. A fund that declines slowly and silently gets shown fewer.

What we do with them

Fundamently exists in part to be that layer. We are not a lender and we don’t compete for mezzanine mandates. We assess where a company actually sits, tell them plainly what tier of capital is realistic, and place the ones that need short-duration or below-minimum structures with funding partners who underwrite that size. When a company grows into a real subordinated need, the referring fund is the first call.

If you run a credit shop and want a defined home for the files you decline on size, that’s a conversation worth having.

Talk to us

Partner with us if you’d like a referral path for below-minimum files, or send a file over if you want a read on where a specific company actually sits in the stack.

Educational only. Nothing here is an offer of credit, a commitment to lend, or advice on any specific transaction.