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Elephant Bar Restaurant: Mezzanine Financing
Chaplinsky, Susan; Anderson, Kristina Case F-1542 / Published September 20, 2007 / 29 pages.
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Product Overview

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.


Learning Objectives

The case asks students to qualitatively evaluate the potential benefits and risks of the investment and to quantitatively value the deal. Cash-flow projections for both the management case and the base case are provided in the case. The main analytical task is for students to determine the projected IRR under the two scenarios; they can also adjust the warrant coverage to enhance returns to enable Allied Capital to earn its targeted rate of return of 18% to 19%.

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  • Overview

    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.

  • Learning Objectives

    Learning Objectives

    The case asks students to qualitatively evaluate the potential benefits and risks of the investment and to quantitatively value the deal. Cash-flow projections for both the management case and the base case are provided in the case. The main analytical task is for students to determine the projected IRR under the two scenarios; they can also adjust the warrant coverage to enhance returns to enable Allied Capital to earn its targeted rate of return of 18% to 19%.