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Impact Fund Denmark approves a USD 15 million investment in Verdant Capital Hybrid Fund (VCHF), a pan-African fund managed by Verdant Capital.

This commitment, announced in early January 2026, supports hybrid and mezzanine capital deployment to financial institutions lending to micro, small, and medium-sized enterprises (MSMEs) across countries including Egypt, Ghana, Kenya, Nigeria, Uganda, Rwanda, South Africa, Tanzania, Zambia, and Zimbabwe.

Nitish Chawla, Investment Director in Financial Services at Impact Fund Denmark, stated: “An investment like this addresses a specific and significant issue in many developing countries, namely the lack of financing for small businesses.”

The fund utilises hybrid instruments, including subordinated debt (mezzanine) and preferred equity, to bridge the MSME credit gap and promote job creation and economic growth.

Understanding Mezzanine Debt

Mezzanine debt represents a subordinated form of financing that sits between senior debt and equity in a company’s capital structure.

It functions primarily as debt, typically carrying a fixed or floating interest rate with periodic payments, and often includes equity-like features such as warrants or conversion rights.

In the event of default or liquidation, mezzanine debt holders have priority over equity but rank below senior lenders.

For small businesses in Africa, mezzanine debt offers flexible, long-term capital, often with maturities of five years or more without immediate collateral requirements in many cases.

It suits growth-orientated MSMEs needing funds for expansion, acquisitions, or working capital while preserving ownership control. Interest payments may be tax-deductible, providing a cost advantage over equity.

Understanding Preferred Equity

Preferred equity constitutes an equity investment with preferential rights over common equity. Holders receive priority in dividend distributions and repayment of capital upon liquidation or exit events, often with a fixed or cumulative dividend rate.

Unlike debt, it does not impose mandatory repayment obligations unless structured with redemption features, and it typically lacks fixed maturity dates.

In African contexts, preferred equity enables investors to participate in upside potential through profit-sharing or conversion mechanisms while offering downside protection relative to common equity.

It appeals to businesses seeking capital without repayment pressure, though it may involve some dilution of control or governance influence.

Key Differences Between Mezzanine Debt and Preferred Equity

The primary distinctions arise from their classification, risk-return profile, and implications for borrowers:

• Legal Structure and Classification: Mezzanine debt is treated as a liability on the balance sheet (a loan), while preferred equity appears as equity. This affects accounting, tax treatment, and regulatory compliance.
• Repayment Obligations: Mezzanine debt generally requires interest payments and principal repayment at maturity, creating fixed obligations. Preferred equity typically features discretionary or cumulative dividends, with no mandatory repayment unless redeemed.
• Priority in Liquidation: Mezzanine debt ranks above preferred equity (and common equity) but below senior debt. Preferred equity holds seniority over common equity but is subordinate to all debt forms.
• Tax Implications: Interest on mezzanine debt is often tax-deductible for the borrower, reducing effective cost. Dividends on preferred equity are usually not deductible.
• Cost and Returns: Mezzanine debt commands higher interest rates (reflecting subordination risk) but lower overall cost than equity due to tax benefits and lack of upside sharing. Preferred equity may yield higher targeted returns through dividends and participation in profits.
• Dilution and Control: Mezzanine debt is less dilutive, often preserving full ownership (though warrants may introduce minor equity elements). Preferred equity involves ownership stakes, potentially granting investors voting or approval rights.
• Risk Profile: Mezzanine debt carries lender-like protections (e.g., covenants, potential security interests). Preferred equity exposes investors to greater equity-like risk but offers participation in growth.

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Relevance to Small Businesses in Africa

In Africa’s MSME financing landscape, where traditional bank lending remains constrained, both instruments address the credit gap efficiently through intermediaries like those supported by VCHF.

Mezzanine debt suits businesses with predictable cash flows seeking non-dilutive growth capital, while preferred equity benefits those prioritising flexibility and upside alignment.

Hybrid approaches, as employed by funds like VCHF, combine elements to optimise leverage, crowd in senior debt, and maximise developmental impact.

Investments such as Impact Fund Denmark’s commitment to the Verdant Capital Hybrid Fund as of January 13, 2026, illustrates how these instruments can scale lending to underserved MSMEs, fostering sustainable economic development.

Businesses considering these options should evaluate their cash flow stability, growth trajectory, and ownership preferences in consultation with financial advisors.

For specific opportunities, refer to official fund documentation or impact investment platforms.

Mezzanine Financing Overview

What is a mezzanine is best explained as a hybrid form of capital that sits between senior debt and equity, commonly structured as mezzanine debt with equity-like features such as warrants.

A typical mezzanine financing example involves a growing company raising capital to fund expansion or acquisitions, where mezzanine financing companies provide funding in exchange for higher returns reflected in mezzanine finance rates.

In practice, mezzanine debt vs preferred equity comparisons focus on differences in risk, return, and control, while mezzanine financing in venture capital is often used in later-stage rounds to bridge valuation gaps.

Within the broader investment landscape, mezzanine private equity strategies play a key role in leveraged buyouts and growth financing by offering flexible capital solutions.

Ronnie Paul is a seasoned writer and analyst with a prolific portfolio of over 1,000 published articles, specialising in fintech, cryptocurrency, and digital finance at Africa Digest News.