Mezzanine is not a miracle: financing growth without surrendering the company

Growth capital is sold as a cure for ambition. In practice it is a set of obligations that will outlast the enthusiasm of the quarter in which it was raised. Before choosing between equity, mezzanine and senior debt, it helps to be clear about what each instrument actually costs — not only in interest, but in control.

The real cost of dilution

Equity is the most expensive capital on the page and the easiest to underprice. A founder who sells 20 per cent of a business at a €60 million valuation has sold €12 million of value today for cash that may be worth considerably more if the plan works. If the plan does not work, the dilution is permanent and the cash is gone.

Debt has the opposite profile. It is cheaper, it preserves ownership and it imposes discipline. It also imposes covenants, reporting and a maturity that does not care about the market cycle.

When debt is the right instrument

Debt works when the business has predictable cash flow, a credible base case and a use of proceeds that generates a return above the cost of capital. It works less well when the plan depends on a single contract, a regulatory approval or a founder’s personal relationships.

Mezzanine and unitranche sit between the two. They can be structured with lower amortisation, a longer tenor and more flexible covenants than senior bank debt, at a higher price. For a family-owned business that wants to fund an acquisition without diluting the family, they are often the most sensible instrument available.

Covenants are the price

The headline margin is the visible cost. The covenant package is the real one. Leverage tests, interest cover, capital expenditure limits, restrictions on dividends and change-of-control provisions determine what the business can actually do after signing. A lender that offers 50 basis points less but restricts the next acquisition has not necessarily offered a better deal.

We negotiate the covenant package before the term sheet is signed, not after. The best time to discover that a lender will not permit a distribution is before the family has committed to the timetable.

Capital should buy the next chapter, not mortgage the one after it.

Questions to ask before signing

• What is the maturity, and what is the realistic refinancing market at that date?
• Which covenants are tested, how often, and with what cure rights?
• Can the business make acquisitions, pay dividends or buy back shares without consent?
• What happens on a change of control, and who controls the equity after a default?
• Is the lender able to syndicate or transfer the facility, and to whom?

The honest capital stack

There is no universally correct capital structure. There is only one that matches the cash flows, the ownership ambitions and the risk appetite of the people who will live with it. Our job is to model the options honestly, including the option of raising less, and to negotiate the terms that protect the business if the forecast is wrong.

Growth is not a race to raise the most. It is a discipline of choosing the capital that lets you keep the company you built.