How acquisition financing works through private credit in India — and when it is the right structure

Acquisition financing is appropriate when three conditions are met simultaneously.

First, the acquisition target has stable, predictable cash flows that will continue post-acquisition — the debt is being serviced from the target's or combined entity's operating cash generation, not from asset liquidation or the acquirer's existing business alone.

Second, the combined entity has adequate security — assets that can back the debt and provide the lender with meaningful recovery in a stress scenario. An asset-light acquisition of a services business or a software company is difficult to finance through private credit for exactly this reason — there are insufficient tangible assets to secure the debt.

Third, the acquisition is being made at a valuation that leaves room for the combined entity to service the debt comfortably. An acquisition made at 8x EBITDA with 60% debt funding creates a debt-to-EBITDA of approximately 5x on the combined entity, which is manageable for a stable business. The same acquisition at 15x EBITDA with 60% debt funding creates leverage that is difficult to sustain through any business variability.

Private credit acquisition financing in India is most commonly structured as a combination of senior secured debt (from a bank or NBFC) and mezzanine or structured debt (from a private credit fund or AIF). The senior debt has a first charge on assets and first priority on repayment. The mezzanine debt has a second or subordinated charge and a higher coupon rate to compensate for the additional risk.

For a ₹100 crore acquisition:

Acquirer equity contribution: ₹40 crore (40%)

Senior debt from bank/NBFC: ₹40 crore (40%) — secured against assets of the combined entity

Mezzanine/structured debt from private credit fund: ₹20 crore (20%) — second charge, higher coupon

The mezzanine debt provider earns a higher return — typically 300-500 basis points above the senior debt coupon — in exchange for the subordinated position and the additional risk. The structure allows the acquirer to complete a larger acquisition with less equity than would otherwise be required.

Acquisition financing due diligence is more complex than standard expansion financing because the lender is underwriting two businesses — the acquirer and the target — and the combined entity they will create.

Target financial due diligence: The lender's team will examine the target's financial statements as thoroughly as the acquirer's own advisors — sometimes more thoroughly. Revenue quality (is the revenue recurring or episodic?), customer concentration, contract terms with key customers, working capital dynamics, contingent liabilities, and pending litigation are all examined in detail. A lender who discovers material information about the target during due diligence that the acquirer's team missed will either reprice the transaction or decline to proceed.

Integration assumptions: The lender will evaluate the acquirer's post-acquisition integration plan. Revenue synergies are viewed skeptically — lenders do not lend against synergies that have not yet been realised. Cost synergies with specific action plans and timelines are more credible. The DSCR is calculated against the standalone cash flows of the combined entity, not the synergy-adjusted projections.

Management of the acquired entity: Lenders assess whether the acquirer has the management capacity to run the combined entity effectively. An acquirer taking on a business that requires specialist management they do not have — a consumer brand acquiring a manufacturer in a completely different operating model — presents management risk that affects the lender's credit assessment.

Acquisition financing is time-pressured in a way that other private credit mandates are not. The seller typically has a defined transaction timeline, and the acquirer needs financing committed within that window. This creates a specific challenge: lenders need adequate time to conduct proper due diligence, but the deal timeline may not accommodate a standard 6-8 week due diligence process.

The borrowers who close acquisition financing efficiently arrive with complete due diligence on the target already conducted — financial DD, legal DD, and technical DD in an organised data room — so that the lender's process can run concurrently with the final transaction negotiations rather than sequentially.