What are structured capital strategies?

Structured capital strategies are smart financial plans companies, and investors use to tackle money challenges or reach financial goals. 

Capital strategies like these usually combine financial tools like debt, equity, and derivative securities.

This approach is all about:

  • Securing funding efficiently
  • Protecting your company from financial risks
  • Hitting specific financial targets

Every business has its own unique financial needs and market pressures. With structured capital strategies, you can access diverse funding sources, tailor financial products to specific needs, and achieve strategic goals such as expansion, acquisition, or restructuring.

Whether you're looking to manage risk, increase liquidity, or fund growth, these 10 structured capital strategies could be just what you need to outsmart the market. 

10 structured capital strategies

1. Mezzanine financing

If you can get past the strange name, mezzanine financing can be very useful as a capital strategy because it's like a hybrid of debt and equity financing. You borrow money, but the lender can also become a part-owner if you can't repay it. They get paid after everyone else who's lent you money (such as venture capital companies, etc.).

It’s most commonly used when companies are buying other companies or growing incredibly fast. Although it offers higher returns to investors compared to traditional debt, it does carry higher risk. For this reason, investors often expect a higher return. They usually want to earn 12-20%, which is more than you'd pay for a normal loan. 

2. Securitization 

Securitization is like bundling a bunch of loans together (like mortgages or car loans) and selling pieces of that bundle to investors. You essentially sell their related cash flows to third-party investors as securities.

This helps companies get rid of loans and get cash faster. It also spreads the risk around, so if some people don't pay back their loans, it doesn't hit the company as hard.

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3. Convertible bonds 

Convertible securities are bonds and preferred shares that can be converted into a predetermined number of the issuing company's shares. 

They’re useful for both investors and companies: 

  • For investors, it's like having a safety net (the loan part) with a chance to win big (if the company does well, the shares go up).
  • For companies, they can borrow money at a lower rate because investors have a chance to make more money.

4. Credit derivatives 

Credit derivatives are financial bets on whether someone (like a company or a country) will pay back their debts. Instead of buying their actual loan, you're purchasing an insurance policy of sorts.

One of the most famous credit derivatives is a Credit Default Swap (CDS). This lets companies manage risk by transferring it to other parties. These can be used to hedge against potential credit events like defaults or downgrades. 

Credit derivatives were a big part of the 2008 financial crisis because they got really complicated and risky. 

5. Structured notes

Another commonly used structured capital strategy involves debt securities with embedded derivatives, which provide a customized risk-return profile.

These notes are linked to various underlying assets, such as stocks, commodities, or interest rates. By combining debt with derivatives, issuers can create a wide range of payoff structures to meet diverse investor preferences.

Structured notes can be tailored to specific investment objectives, offering potential upside while often providing some downside protection. However, their complexity and lack of liquidity can be a problem.

6. Asset-backed securities (ABS)

ABS are bonds or notes backed by financial assets such as loans, leases, credit card debt, or receivables. This provides a way to raise funds by leveraging asset portfolios while diversifying risk by pooling assets.

According to the Asset-Backed Securities Global Market Report 2024, the ABS market size will likely see strong growth over the next few years. It’s expected to grow to $3112.45 billion in 2028 at a compound annual growth rate (CAGR) of 6.3%.

7. Private placements

A private placement is when a company sells securities directly to a select group of investors, bypassing the public market. It's a key component of structured capital strategies, offering tailored financing solutions. 

Compared to public offerings, private placements are less bureaucratic, quicker to execute, and allow for more flexible terms.

However, McKinsey Global Private Markets Review revealed that private markets actually entered a slower era in recent years with “macroeconomic headwinds, rising financing costs and an uncertain growth outlook weighing on fundraising, deal activity, and performance.” 

Despite these headwinds, private placements remain a valuable option for companies with a clear growth strategy and the ability to navigate the complexities of the private market.

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8. Recapitalization

Wall Street Prep defines recapitalization as a catch-all term “referring to measures taken by companies to adjust the debt-to-equity (D/E) mixture within their capital structures.” 

There are different forms of recapitalization including debt-to-equity swaps, issuing new equity, and refinancing debt. This type of capital strategy is used to stabilize a company’s capital structure, typically after a significant event such as a buyout.

Companies usually choose recapitalization from other structured capital strategies to improve financial stability, manage leverage, or during restructuring.

Recapitalizations were a key strategy for companies during the COVID-19 pandemic to manage liquidity.

9. Tax-advantaged financing 

Tax-advantaged financing is a way for companies to optimize the tax position of a company, such as:

  • Tax-exempt bonds are loans where the interest you pay isn't taxed. Think of municipal bonds used to build schools or roads. 
  • Tax credit investments let you invest in projects like affordable housing and get a tax break in return. 

The big benefit for companies is a lower overall cost of capital. Less tax means more money to reinvest in the business.

10. Hybrid securities 

Hybrid securities are financial instruments that blend the characteristics of both debt and equity. They're like a financial chameleon, changing color depending on how you look at them.

Common types include preferred stock, equity-linked debt, and convertible preferred stock. These securities typically offer a fixed income component, similar to a bond, but also have the potential for equity upside, like a stock.

For companies, hybrid securities offer flexibility in their capital structure. They can be used to raise money without diluting ownership as much as issuing common stock, while also providing a lower cost of capital compared to traditional debt.

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Equitable structured capital strategies

Equitable structured capital strategies focus on sharing risks and rewards equally among investors, companies, and others involved. 

The goal? 

To close the gap between those who have access to capital and those who don't, ensuring that everyone benefits.

Key elements of equitable structured capital strategies include:

  • Inclusive access to capital: Making sure everyone from small to minority-owned businesses, have access to structured financing options.
  • Fair risk distribution: Sharing the risk of investments equally among everyone involved.
  • Transparent practices: Being open and honest about how investments work helps to build trust and ensure all stakeholders understand the terms and conditions.
  • Balanced returns: Creating financial products that offer equitable returns to all investors.
  • Sustainable and ethical considerations: Investing in a way that's good for the planet and people.
  • Regulatory compliance: Ensuring that all structured capital strategies comply with relevant regulations and promote fair market practices.

FAQs: Capital strategies

What is the capital strategy?

A capital strategy is a comprehensive plan developed by a company or investor to manage its capital resources effectively.

What is the capital plan strategy?

A capital plan outlines how a company manages its money. It covers spending plans, funding sources, dividends, debt repayments, and back-up plans to ensure financial health and growth.

What is a capital intensive strategy?

Capital intensive strategy means investing heavily in physical assets like machinery, equipment, and infrastructure. This approach is common in manufacturing, energy, and telecommunications industries. It helps achieve economies of scale, boost productivity, and stay ahead of competitors.

Can you share an example of a capital plan?

An example of a capital plan is a company's annual budget for capital expenditures, which details planned investments in property, plant, and equipment.

What is a capital preservation strategy?

A capital preservation strategy focuses on protecting the principal investment amount while minimizing the risk of loss. This approach typically involves investing in low-risk, highly liquid assets such as government bonds, high-quality corporate bonds, and money market funds, aiming for stable, modest returns to ensure the safety of the invested capital.