Elephant Bar Restaurant: Mezzanine Financing

29 Pages Posted: 14 Jun 2009

See all articles by Susan Chaplinsky

Susan Chaplinsky

University of Virginia - Darden School of Business

Abstract

In November 2003, John Fruehwirth, a principal at Allied Capital, was considering a $20 million mezzanine investment in growth capital for Elephant Bar, a California restaurant chain. Elephant Bar had had some initial success in California but now Allied's investment committee had to wrestle with the question of whether the restaurant concept was strong enough to travel and become a national brand or whether it was mainly a “California Concept.” And if the concept was strong enough to travel, would Allied Capital be able to meet its underwriting standards? Because Elephant Bar is a company with aggressive growth plans, it is significantly riskier than traditional mezzanine investments. The case can be used in courses on venture investing to illustrate another funding source available to young companies. Traditional mezzanine financing is often used to provide a portion of the funding for late-stage investments, such as leveraged buyouts. The case can also be used in courses on private equity to illustrate the perspective, risk mitigation strategies, and return expectations of mezzanine investors.This case has a teaching note and a spreadsheet, which are available to registered faculty members.

Excerpt

UVA-F-1542

Rev. Nov. 21, 2016

ELEPHANT BAR RESTAURANT: MEZZANINE FINANCING

John Fruehwirth, a principal at Allied Capital, glanced at his watch and then at the tombstones that filled the dark mahogany shelves of the conference room. He hoped his team's current proposal would soon be commemorated in Lucite, but first he would have to gain the approval of Allied's investment committee, a group he knew going into the meeting was divided on the investment.

In November 2003, Fruehwirth's team was proposing a $ 20 million mezzanine debt investment in the Elephant Bar Restaurant Company, a chain of restaurants in California with significant growth potential. Fruehwirth knew from experience that members of the investment committee were skeptical of investments in the restaurant business. The restaurant industry traditionally had high turnover, and individual restaurant chains were exposed to many risks that were outside of management's control. Furthermore, just because a restaurant was successful in one part of the country did not mean that its concept would transfer easily to other regions. Elephant Bar had had some initial success in California, but now the committee had to wrestle with the question of whether the restaurant concept was strong enough to travel and become a national brand or whether it was mainly a “California concept.” And if the concept was strong enough to travel, would Allied Capital be able to meet its underwriting standards?

Mezzanine Private Equity

. . .

Keywords: private equity, mezzanine financing, venture financing

Suggested Citation

Chaplinsky, Susan J., Elephant Bar Restaurant: Mezzanine Financing. Darden Case No. UVA-F-1542. Available at SSRN: https://ssrn.com/abstract=1418894

Susan J. Chaplinsky (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4810 (Phone)
434-243-7676 (Fax)

HOME PAGE: http://www.darden.virginia.edu/faculty/chaplinsky.htm

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