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Private Capital Markets: Valuation, Capitalization, and Transfer of Private Business Interests + Website, 2nd Edition by Robert T. Slee

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CHAPTER 25

Capital Structure: Conclusion

Since the ability to access capital directly affects the value of a business, owner-managers need to understand the ramifications of this value-capitalization relationship in the private capital markets. The previous chapters described the fundamental concepts underlying the capitalization of private businesses. This chapter builds on these fundamentals with a discussion of these issues:

  • Capital providers use credit boxes and other devices to manage risk and return in their portfolios.
  • Expected returns to institutional capital providers comprise the Pepperdine Private Capital Market Line.
  • Private cost of capital emanates from the private capital markets.
  • High cost of capital limits private company value creation.
  • Intermediation is relatively ineffective in the middle market.
  • Capitalization is triangulated to valuation and business transfer.

CAPITAL PROVIDERS MANAGE RISK AND RETURN IN THEIR PORTFOLIOS

Capital providers use credit boxes and other devices to manage risk and return in their portfolios. Institutional capital providers use portfolio theory to obtain this goal. Diversifying risk while optimizing return is the promise of portfolio theory. It is built on the premise that the risk inherent in any single asset, when held in a group of assets, is different from the inherent risk of that asset in isolation.

Capital providers employ credit boxes to filter asset quality and set return expectations. In other words, loans or investments ...

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