CHAPTER 16

Capital Structure: Introduction

The term “capital structure” refers to the mix of debt and equity financing in a business. Private debt and equity are raised in the private capital markets. Because these markets are quite different from their public counterparts, comparison and analysis is fraught with uncertainty. Investment bankers for large public companies access the public capital markets somewhat predictably. This enables financial managers of public companies to plan their capital structure. Private companies, however, must create capital structure solutions one deal at a time. This difference is monumental. The public capital markets structure helps public companies plan and execute capital solutions with certainty. The private capital markets have much less structure and, even with expert guidance, may not yield any capital.

Yet there is a structure of capital alternatives in the private capital markets. Unlike the organized structure of public capital markets, private markets are more ad hoc. Private markets are more like an outdoor bazaar while public markets resemble a supermarket. Nearly all capital alternatives are available in the private bazaar, but they are found in separate shops or discrete increments. To make financing in private markets even more difficult, capital providers in the bazaar constantly move around and may or may not rely on prior transactions to make current decisions. Fortunately, for those in need of private capital, some organization ...

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