Mezzanine financing

Mezzanine financing sits in the capital-structure middle layer — below senior secured debt in repayment priority, but above ordinary equity. This subordinated position means mezzanine lenders accept higher risk than a bank does, and they price for it through higher interest rates, payment-in-kind (PIK) options, and equity kickers such as warrants or conversion rights.

For a growth-stage founder, mezzanine capital solves a specific problem: the business needs more capital than senior lenders will provide without equity dilution that feels premature or overpriced. Mezzanine fills that gap — it is more patient than bank debt (often interest-only for several years) and less dilutive than equity because conversion is contingent and capped.

In India, mezzanine structures appear in private-equity-backed buyouts, real-estate development, and infrastructure financing, where ticket sizes tend to be large. For startups, the instrument surfaces most often at late-growth or pre-IPO stage — companies with predictable EBITDA that can service the coupon but want to delay a full equity raise. Some Alternative Investment Funds (Category II AIFs) in India deploy mezzanine strategies, investing in instruments like Optionally Convertible Debentures (OCDs) and Compulsorily Convertible Debentures (CCDs) that blend debt economics with equity optionality.

Founders should approach mezzanine with clear exit-path thinking: the instrument is most efficient when a defined liquidity event — a strategic sale, IPO, or large equity round — will repay it. Mezzanine on a business without a clear exit horizon can become expensive and structurally complex to unwind.