Answer: Mezzanine debt

**Explanation:** Mezzanine debt is the correct answer because it typically includes equity participation features. Here's why: 1. **Mezzanine Debt Characteristics:** - Mezzanine debt is a hybrid financing instrument that combines debt and equity features - It often includes equity warrants or conversion rights that allow lenders to participate in the company's equity upside - This equity participation compensates lenders for taking higher risk than senior debt holders 2. **Comparison with Other Options:** - **Distressed Debt:** While distressed debt investors may sometimes gain equity through debt-for-equity swaps in restructuring situations, this is not a standard feature of the investment category itself - **Unitranche Debt:** This is a single loan that combines senior and subordinated debt features, but typically doesn't include equity participation options 3. **Investment Rationale:** - Mezzanine lenders accept lower current interest rates in exchange for potential equity upside - The equity kicker (warrants or conversion rights) provides additional return potential if the company performs well - This structure aligns the interests of lenders and equity holders **Key Takeaway:** Mezzanine debt is specifically structured to provide lenders with equity participation options as compensation for taking subordinated debt positions with higher risk profiles.

Author: LeetQuiz .