Mezzanine and blended structures

The gap mezzanine fills

Picture a profitable business needing R30m to expand. Its cash flow could comfortably service the repayments, but the security available covers only R15m, and a bank will not lend beyond its cover. The business is not too risky — it is simply under-secured.

Selling equity to close that R15m gap means giving away a share of everything the business will ever be worth to solve a temporary shortfall of collateral. Mezzanine offers a middle route: capital priced for the additional risk, ranking behind the senior lender, without surrendering ownership outright.

This gap is unusually wide in African markets, because the private credit layer that fills it elsewhere is thin here. It is a large part of why dilution levels in African growth businesses are often higher than the underlying risk warrants — businesses sell equity they did not structurally need to sell. The African capital stack traces the shape of that gap.

How mezzanine is priced and structured

Pricing reflects the position in the queue. Mezzanine ranks behind senior debt, so in a failure it is repaid only after the senior lender is whole — and frequently recovers nothing. It therefore prices well above bank debt, and typically combines several components.

Cash interest paid periodically, as with any loan. PIK interest — payment in kind — which is not paid in cash but added to the principal, so the balance grows and the whole amount is settled at the end. This preserves cash during the expansion the money was raised for, and it compounds, so the final figure can be considerably larger than founders model. Warrants or an equity kicker, giving the lender a right to acquire a small shareholding, so they participate if the business does well.

That last component is the point. The lender accepts equity-like risk and needs some equity-like return to justify it, but the dilution involved is a fraction of what an equity round would cost.

When mezzanine makes sense, and when it does not

It fits where cash flow is strong and predictable but security is short; where the business is profitable and the owner does not want to dilute; where an acquisition or expansion has a clear payback; and where the need sits above what a bank will lend and below what justifies an equity round.

It does not fit where cash flow is uncertain. Mezzanine still has to be serviced, and PIK interest does not remove the obligation — it defers and enlarges it. A business that cannot see its way to repayment is adding a compounding liability rather than solving a problem, and it will discover that at the worst moment.

It also does not fit small requirements. The structuring work is substantial, so minimum sizes are meaningful. Below that threshold the honest answers are usually asset finance, transaction finance, or patience.

Blended finance

Blended finance combines capital with different return expectations in one structure, so that concessional or mandate-driven money makes a transaction possible that purely commercial capital would not fund alone.

In practice this means a development finance institution, a grant programme or a guarantee facility taking a first-loss or subordinated position, which reduces the risk enough for a commercial lender or investor to participate at a rate they can justify. The concessional layer is not subsidising profit; it is buying down risk to unlock capital that would otherwise stay away.

It is common in African markets precisely because the capital stack has gaps. Renewable energy, agri-processing, healthcare infrastructure and financial inclusion are the sectors where it appears most, since these carry development outcomes that mandate-driven capital exists to support.

The trade is real. Blended structures take longer to assemble, involve multiple parties whose conditions must be reconciled, and carry reporting obligations lasting the life of the facility. Cheaper is not the same as lighter. Blended finance and DFI funding covers how these are actually put together.

Who provides this capital in African markets

The providers are more varied than the label suggests. Specialist private credit funds, some pan-African and some regional, deploy exactly this instrument as their core strategy. Development finance institutions frequently offer subordinated facilities directly, often on longer tenors than commercial lenders will contemplate. Bank mezzanine desks exist at the larger South African institutions, usually alongside their own senior lending. And family offices and insurers increasingly participate, attracted by returns above bond yields with more protection than equity.

The practical consequence is that a business is not choosing between one mezzanine provider and equity. It is choosing among several structures with genuinely different tenors, covenant packages and reporting demands — which is worth running as a comparison rather than accepting the first offer that closes the gap.

Reading a mezzanine or blended term sheet

Four questions cut through most of the complexity. What is the all-in cost including PIK accrual and the value of any warrants, expressed as a single number over the expected life? Where does this rank, and what happens to it if the senior lender enforces? What are the covenants, and how much headroom exists against a realistic downside rather than the plan? And what does the mandate layer require in reporting, for how long, and who inside the business will actually do it?

That last question is the one most often skipped and most often regretted. Mandate reporting is a permanent operational commitment, not a condition precedent to be satisfied once and forgotten.