SBI Cap eyes mezzanine finance

SBI Capital Markets, the investment banking arm of State Bank of India (SBI), is entering into mezzanine financing segment.

SBI Caps, along with its parent SBI, will make a joint announcement today on the investment bank's foray into mezzanine financing, to launching various venture funding products, SBI sources said.

Mezzanine financing is likely to be targeted at small and medium enterprises (SMEs), which are in greater need of such funding for expansion. It also reduces the need for dependence entirely on equity.

Mezzanine financing is a hybrid of debt and equity financing and is generally provided to finance expansion projects. It is basically provision of short-term financing and involves high risk, and therefore, has high yield.

Mezzanine finance is the kind of funding that is typically advanced by venture capital companies or and institutions seeking a higher rate of return, and is extended to companies with a sound track record and a bankable plan for expansion.

Bankers said Mezzanine financing could provide an internal rate of return of upto 20 per cent. The return will be lower than that on equity investments, but certainly higher than pure debt loans.

Mezzanine finance is normally provided to companies with a track record and a bankable plan for expansion of business. It is debt capital with the right to convert into equity and is generally subordinate to debt provided by banks.

Mezzanine finance is also considered like equity on the balance sheet and enables a company to obtain additional funding from banks.