Understanding the Middle Layer of Finance

Every great development or acquisition is built on a foundation of structure — not just bricks and mortar.
Between traditional senior lending and full developer equity lies a crucial middle layer: structured capital.

In 2025, this middle layer has become the focus of sophisticated investors, family offices, and private credit funds who are redefining how property deals are funded. The two primary tools — mezzanine debt and preferred equity — achieve similar goals but operate very differently.

Both provide capital that sits behind senior debt yet ahead of common equity. Both can enhance leverage, preserve liquidity, and make complex deals viable. But how they do it — and what they mean for control, cost, and risk — has evolved dramatically in the past two years.

Understanding the distinction isn’t just technical. It’s strategic. It determines who controls the project, how returns are distributed, and how lenders view your overall capital structure.

The Market Context in 2025

Since mid-2024, UK property finance has undergone a quiet revolution. As base rates stabilised and inflation cooled, traditional lenders cautiously reopened their books — but only for low-risk, low-leverage transactions.

For developers and investors targeting strong returns, that left a gap. Senior debt now typically stops around 55–60% loan-to-value (LTV), leaving a large equity hole to fill. At the same time, private credit funds have grown rapidly, eager to provide higher-yield, lower-risk capital in structured formats.

This is the landscape explored in Private Credit vs. Private Banking: Choosing the Right Partner for Large Property Finance.

In 2025, private credit is not just a competitor to banks — it’s a partner. And nowhere is that more visible than in the middle of the capital stack.

What Is Mezzanine Finance?

Mezzanine finance is debt — but it’s flexible, strategic, and bespoke. It usually sits behind a senior loan, topping up total leverage to as much as 75–80% of the project’s cost or value.

The mezzanine lender takes a second charge over the property or, in some cases, a share pledge in the development company. Interest rates are higher than senior debt, but far below the cost of raising equivalent capital through equity.

In return, mezzanine lenders accept greater risk: they are repaid after the senior lender but before shareholders. To offset this, many structures include an equity kicker — a profit share or exit participation that enhances returns if the project outperforms.

In today’s market, mezzanine finance has evolved into an institutional-grade product. Pricing has narrowed — typically 10–14% IRR equivalent — and underwriting standards mirror those of mainstream banks. For private borrowers, that combination of speed, sophistication, and non-dilutive leverage can make a previously impossible project viable.

What Is Preferred Equity?

Preferred equity, by contrast, is not debt at all. It’s a quasi-equity investment that sits between common equity and mezzanine debt. The investor injects capital into the project but receives priority returns before the developer’s ordinary shares see any profit.

There is no fixed interest rate or scheduled repayment. Instead, preferred equity investors receive a preferred return — often between 8% and 12% — plus a share of the upside above a pre-agreed hurdle. They may also take enhanced governance rights, such as approval over major budget changes or asset sales.

Preferred equity is popular with family offices and private investors who want to participate in property development without managing construction or taking full speculative risk. For developers, it provides an equity-style buffer that strengthens the balance sheet and appeals to senior lenders wary of over-leverage.

The difference between the two models is best thought of as this: mezzanine lenders get paid first, preferred equity partners own first.

Choosing Between Them

In practice, the decision between mezzanine and preferred equity depends on five key factors: control, security, cost, tax, and exit.

• Control:
  Mezzanine lenders have contractual rights but little operational say. Preferred equity investors often require board seats or veto rights over major decisions.

• Security:
  Mezzanine lenders hold a legal charge; preferred equity investors do not. This difference affects how risk is allocated in default scenarios.

• Cost:
  Mezzanine debt is cheaper in absolute terms but adds fixed obligations to cash flow. Preferred equity is costlier but more flexible during build or lease-up phases.

• Tax:
  Mezzanine interest is deductible; preferred equity distributions are not. That can make a major difference depending on project structure.

• Exit:
  Mezzanine debt must be refinanced or repaid on completion. Preferred equity typically remains until a capital event or sale.

In short, mezzanine finance is a lever, while preferred equity is a partnership.

Developers often combine both — a hybrid structure that maximises leverage, manages cash flow, and protects upside. These hybrid models are increasingly common in large schemes like those explored in Funding Large-Scale Development Projects in 2025, where risk-sharing between debt and equity is critical.

The Rise of Structured Capital in Private Credit

Private credit funds now dominate this part of the market. They’re faster, more creative, and less constrained than banks — designing bespoke instruments that blend elements of both mezzanine and preferred equity.

We’re seeing term sheets that include PIK (payment-in-kind) interest, profit-participating notes, and convertible preferred tranches that automatically convert to equity under certain conditions.

For ultra-high-net-worth developers and family offices, this sophistication offers a unique advantage: they can raise capital that behaves like equity but prices like debt — a vital strategy in volatile markets where speed, discretion, and flexibility matter more than headline rates.

It’s the same philosophy behind modern private banking relationships, where lending is used strategically rather than reactively — a concept discussed in High Net Worth Mortgages in 2025: What Lenders Look for Beyond Income.

Why 2025 Is Different

In previous cycles, mezzanine and preferred equity were tools of last resort. Today, they are front-line instruments used by institutional-grade borrowers.

Rising build costs, planning delays, and ESG compliance have made senior lenders cautious. But capital still needs to flow. The result is a market where private credit and family offices provide the bridge — combining entrepreneurial speed with institutional discipline.

This democratisation of structured capital means developers with the right profile — strong track record, transparent financials, and clear exit strategy — can now access facilities that would once have required investment-bank sponsorship.

For family offices, it’s equally transformative. Many now participate as preferred equity providers, generating 10–12% annualised returns secured against tangible assets. In a low-yield world, that’s compelling.

How Willow Private Finance Helps

At Willow Private Finance, we specialise in structuring and negotiating the middle layer of property finance.

Our team works with senior lenders, private credit funds, and investors to design capital stacks that balance cost with control. Whether you’re a developer seeking to extend leverage through mezzanine debt or a family office exploring preferred equity opportunities, we ensure every layer of the structure serves your long-term objectives.

We’ve arranged facilities from £2 million to £150 million, often combining senior, mezzanine, and equity in a single coordinated transaction. By maintaining relationships across both lending and investment markets, we give clients access to capital that traditional brokers simply can’t reach.

Our role doesn’t end at introduction — we oversee term sheet alignment, legal coordination, and lender engagement to protect your commercial position through to completion.

Frequently Asked Questions

1. Is mezzanine finance riskier than preferred equity?
For the lender, yes — mezzanine ranks behind senior debt in repayment. For the borrower, mezzanine is less risky to control because it avoids ownership dilution.

2. Can preferred equity replace mezzanine debt entirely?
It can, but it changes the structure. Preferred equity introduces shared ownership and less security for the investor, which may reduce senior lender appetite.

3. How do returns compare?
In 2025, mezzanine pricing typically equates to a 10–14% IRR, while preferred equity targets 8–12% with potential upside.

4. Who provides these facilities?
Private credit funds, family offices, and specialist institutional lenders dominate this market — often working alongside senior banks.

5. Can both be used together?
Yes. Many high-value schemes now include both — mezzanine debt to boost leverage, and preferred equity to attract aligned long-term capital.

📞 Need Help Structuring the Middle Layer of Your Capital Stack?



Book a free strategy call with one of our structured finance specialists.
We’ll help you design the right balance between debt, equity, and control.