How To Determine If Private Equity is a Financing Option | NetSuite (2022)

How To Determine If Private Equity is a Financing Option | NetSuite (1)

In short:

  • For companies looking to unlock value, private equity may be a source of cash and support
  • CFOs must help demonstrate that their companies have the infrastructure, team, strategy and growth potential in place to warrant investment
  • Prior to “tying the knot” with a PE firm, make sure you have a cultural fit and aligned goals

The private equity industry had nearly $1.5 trillion to invest at the end of 2019, according to Preqin. That’s a record, and thus far, investors, while clearly cautious, are not staying on the sidelines: 78% of respondents to a March 17 Eaton Partners survey of leading funding partners say they will not reduce or pull capital out of specific geographic regions because of the novel coronavirus.

PE firms have the funds to alleviate some financial struggles or fuel growth. However, this is not a relationship that either side enters into lightly. Partnering with a private equity firm is often compared with a marriage — and in this analogy, due diligence is the dating period. To ensure a successful union, both sides must know what they are looking for in a partner and what to expect when they tie the knot.

Current State of Private Equity

Let’s address the elephant in the room: PE doesn’t have the best reputation. Nicknamed “raiders,” “sharks” and “vultures,” they’re blamed for the fall of well-known, and sometimes beloved, brands like Toys “R” Us, Nine West and Payless. However, there are vast differences in strategy among PE firms. The ones that make the news are those that conduct leveraged buyouts and work to create value for the shareholders of struggling companies, like those brick-and-mortar retailers. These efforts drive the overhaul actions that PE is infamous for — restructuring, wage cuts, layoffs.

However, deals driven by both venture and growth capital, a form of venture funding for more mature companies, have fueled some of the market’s most notable successes. For example, Airbnb took both venture and growth capital funding. An investment to propel growth for a minority interest is vastly different from a buyout, where a PE firm will acquire a controlling interest in a company and make sweeping changes in corporate management.

(Video) Private Equity Fund Structure

The industry is diverse. And that diversity can deliver valuable capital, provided that both sides agree on the objectives behind the investment prior to beginning the relationship.

Common Types of Private Equity Deals
Deal Type Description Targets
Venture Capital Invests in companies with high growth potential that are in the early stages of development. Startup, early-stage and emerging companies.
Real Estate Invests in commercial and residential real estate. Firms will develop, operate and improve properties prior to selling. Land, office, hotels, residential, retail and industrial properties.
Growth Capital Similar to venture capital but for more mature companies. Designed to facilitate accelerated growth through expanding/restructuring operations, funding acquisitions or entering new markets. Somewhat mature companies needing funds to scale.
Mezzanine Financing Hybrid of debt and equity financing that falls between equity and senior debt on the balance sheet. Last stop along the capital structure where owners can raise substantial amounts of liquidity without selling a large stake in their company. Established companies with solid cashflow and a solid expansion plan.
Leveraged Buyout (LBO) Utilizes a significant amount of borrowed money to acquire another company. Large and mature companies with steady, predictable cash flows and opportunities to create value by, for example, restructuring.
Distressed/Special Situations Investments in equity or debt securities of financially stressed companies, with the goal to restructure and return the company to financial health. Financially stressed companies.

What Private Equity Firms Are Looking For

PE firms are different from other categories of investors because of their focus on “buying to sell.” A typical PE fund has a life of around 10 years before funds need to be returned to investors. Accordingly, there is a limited time to identify investments, create value, recognize that value through the sale or initial public offering of an investee, and return the sale proceeds to investors.

PE firms typically hold interest in a company for three to seven years while they work to increase value. According to Bain & Company’s 2020 Private Equity Report, the average holding period in 2019 was 4.3 years; that number may increase in 2020 due to the effects of the coronavirus. PE investors try to maximize the internal rate of return on investment (IRR), so it is in their best interest to sell within that target timeframe before the pace of value creation slows.

Time constraints make a PE firm’s assessment process even more critical. To screen a potential investment to determine if it can provide ROI in the investment timeframe, firms are paying particular attention to five company characteristics.

Growth strategy: Growth is a primary driver of value creation. Strong candidates for PE investment are those with multiple potential avenues of growth. Particularly in today’s rapidly changing environment, a company that is dependent on one strategy is a red flag for PE firms. A diverse growth plan will position a company for success, especially in a time of external factors like economic downturns. When it comes to situations like the coronavirus and the resulting economic impact, private equity will likely be looking at how companies plan to operate through and beyond the crisis.

Management: The management team is of immense importance to private equity firms.

“PE firms invest in people as much as ideas,” said Brian Cairns, founder of ProStrategix Consulting. “Do you have the team in place with the right skill set to accomplish what you say you will?” Depending on the type of deal, the post-acquisition agenda can entail significant change, including optimization initiatives, reorganization, restructuring, expanding, acquiring, executive turnover or even layoffs. PE firms look for teams that can effectively execute growth strategies and lead their companies through change. Executive compensation plans are tailored to align management’s interests with those of the PE firm.

(Video) What REALLY is Private Equity? What do Private Equity Firms ACTUALLY do?

A notable exception? In some cases — particularly leveraged buyouts and distressed private equity — a subpar management team could be seen as the factor that needs optimizing. If the PE proceeds with the deal, it’s likely with the intention of replacing leadership.

Technology infrastructure: This is the heavy-hitting newcomer to the list. Technology plays an intrinsic role in the potential value of a company and the speed at which it can provide return on the PE’s investment.

“What many companies don't realize is that in addition to financial and legal due diligence, if your company has any technology assets, either customer software or just plain IT systems, it is very likely a PE firm will hire a consultant to perform technology due diligence,” says Dominic Holt, CTO of Valerian Technology, which provides such services. “This consultant will put together an extensive report on risks and weaknesses the business has from a technology perspective and provide estimates on how long and how much they will cost to fix.”

A company whose technology could be impeding productivity, efficiency, security or any other sources of value will likely deter potential PE investors — particularly if updates would be time-consuming and expensive. One best practice is to evaluate your own security using a recognized methodology before engaging with a potential investor or buyer.

Solid business strategy and revenue: PE firms look for companies with high growth potential and differentiation in their respective markets. Companies should have competitive and sustainable advantages as well as stable, recurring cash flows, inasmuch as that’s possible given external circumstances.

Runway to improve value: Your company is seeking PE investment for a reason. How exactly is an influx of capital going to help you grow and provide a high ROI? Will it fund an acquisition? Help reach new markets? Have a good pitch around how exactly a PE firm’s capital, expertise and insights will create value.

Ultimately, a PE firm is looking to create an investment thesis. This is a statement that outlines the reasoning behind the investment strategy and how the firm will make the business more valuable within the intended time period. It answers the critical question for PE firms: “How can we grow it?”

How To Determine If Private Equity is a Financing Option | NetSuite (2)

(Video) How do Private Equity Firms find deals?

This thesis and details about the underwriting of a potential deal are presented by the PE firm’s deal team to the PE firm’s investment committee, which is typically made up of senior leadership. The committee critically evaluates the investment thesis and the potential for value creation, as well as underlying risks, before granting approval.

What Companies Should Look for From Private Equity Firms

As we’ve discussed, . The same is true for a PE relationship. Prior to embarking on a partnership, conduct your own research in these areas.

Compatibility: José Morey, a startup consultant for MIT’s SOLVE and the NASA iTech accelerator programs, reinforced the PE relationship analogy.

“At its core, the PE relationship is like a marriage,” said Morey. “So, make sure you are comfortable ‘waking up’ with that person every day. If you don't feel comfortable with the person, then walk away. In the end it is always better to get into the right relationship even if it means waiting a little longer then jumping into the first one that says yes. It is important to ‘date around’ and get to know various potential partners before committing.”

Strong management: Capital isn’t the only benefit of a PE partnership. You also get access to professionals, possibly including operating partners with a range of skills, who have experience working with high-performing teams and delivering on ambitious value creation plans. Ideally, a PE firm will bring skills, connections and expertise to the company that complement management’s skill sets.

Past performance: How is the PE firm’s track record? Have investments led to superior performances and solid returns? Do they have experience in your industry? Cairns advises, “If companies are not ‘graduating’ and leaving or being sold, then you have to question their ability to get you to the next level,” says Cairns. Researching a PE firm’s history can help gauge whether their past performance and methods are in line with your company’s goals.

How To Prep for Potential Private Equity Investment

PE investors want to know that executives, including the CFO, fully understand business fundamentals across the commercial, financial, legal and technological areas of the company. Be prepared to show and tell.

Commercial: A comprehensive business plan must enable a PE firm to easily discern the business value and structure behind your company. It should include a financial model with growth rates that support private equity target returns and leverage structures. How exactly is the investment going to support both your and the PE firm’s objectives?

(Video) VC and Private Equity | Equity Funding – Fund Your Business | Dun & Bradstreet

No company exists in a vacuum. Be sure that you and your team know your industry in and out: competitors, customers, market trends and how you fit into that sphere.

“It’s shocking how many startups and even established companies seeking funding don’t have a firm grasp on characteristics of their market like size and growth,” says Cairns. “Nor do they have insight behind the problem they are trying to solve. Why is it important? Finally, how do they plan to uniquely solve it? Without these three things crystal clear and easy to understand, the rest of the pitch is useless.”

Financial: Be prepared to answer questions around historical and projected income statements, balance sheets, capital requirements of the business, cash flow statements and any relevant information around debt. PE firms will then typically hire accountants and/or auditors to review the financials, operations, customers, markets, and tax issues in detail — make sure the financial health of your company stands up to scrutiny.

Legal: PE firms conduct extensive due diligence into any legal liabilities a company may have. Regulatory risk, threatened or ongoing lawsuits, IP issues and prohibitive contract provisions may not even be on your radar — but you can bet they’ll come up during due diligence.

Once the due diligence process has started, unresolved litigation is much more difficult and expensive to address and will delay and potentially kill a deal. Be sure to work with legal to review any potential or ongoing litigation and resolve it ahead of time.

Technological: A poor technology infrastructure affects competitive edge. It also subjects investors to security risk, as we’ve discussed. If you have doubts, Holt recommends hiring a consultant to assess your company’s weaknesses. Going through the process ahead of time allows your CIO to work through issues in a proactive manner, thus protecting the deal.

Due diligence is the chance to make a good first impression and ensure that your company gets an appropriate valuation. Have an idea of what you’re worth and a handle on growth challenges.

PE is a potential source of capital for many companies that need it. With the right amount of preparation and effort in the dating stage, it can become a rewarding marriage for both the investor and investee.

(Video) How Do Private Equity Funds Evaluate Businesses?

Megan O’Brien is Brainyard’s business & finance editor, covering the latest trends in strategy for CFOs. She has written extensively on executive topics as a former content creator for Deloitte’s C-suite programs. Reach Megan here

FAQs

What is equity financing options? ›

Equity financing refers to the sale of company shares in order to raise capital. Investors who purchase the shares are also purchasing ownership rights to the company. Equity financing can refer to the sale of all equity instruments, such as common stock, preferred shares, share warrants, etc.

What are examples of equity financing? ›

Equity financing involves selling a portion of a company's equity in return for capital. For example, the owner of Company ABC might need to raise capital to fund business expansion. The owner decides to give up 10% of ownership in the company and sell it to an investor in return for capital.

How do you choose between debt and equity financing? ›

Consider equity financing if:

You want to avoid debt. Equity financing may be less risky than debt financing because you don't have a loan to repay or collateral at stake. Debt also requires regular repayments, which can hurt your company's cash flow and its ability to grow. You're a startup or not yet profitable.

Is private equity debt financing? ›

The most popular form of private equity funding is a leveraged buyout purchase of a company, using a combination of debt and equity to finance the transaction. Debt financing may account for as much as 90% of the funding.

What are the three forms of equity financing? ›

  • Mezzanine Financing. Mezzanine financing is a combined form of financing that utilizes both debt and equity. ...
  • Venture Capital. Venture capital firms provide funding in exchange for ownership, or shares, of your business. ...
  • Equity Crowdfunding.

What are the two types of equity financing? ›

There are two methods of equity financing: the private placement of stock with investors and public stock offerings. Equity financing differs from debt financing: the first involves selling a portion of equity in the company while the latter involves borrowing money.

What are the 5 sources of equity financing? ›

Sources of equity finance
  • Self-funding. Often called 'bootstrapping', self-funding is often the first step in seeking finance. ...
  • Family or friends. ...
  • Private investors. ...
  • Venture capitalists. ...
  • Stock market.
1 Mar 2022

What are the 6 sources of finance? ›

Six sources of equity finance
  • Business angels. Business angels (BAs) are wealthy individuals who invest in high growth businesses in return for a share in the business. ...
  • Venture capital. ...
  • Crowdfunding. ...
  • Enterprise Investment Scheme (EIS) ...
  • Alternative Platform Finance Scheme. ...
  • The stock market.

What factors should you consider in choosing a financing method? ›

Financing can come in the form of debt or investment, and the terms of the financing can vary significantly between the two. Important factors to consider when choosing methods of financing a business include the repayment terms, the total cost of capital and the requirements of the lender or investor.

Why would a company choose equity financing over debt financing? ›

Less burden. With equity financing, there is no loan to repay. The business doesn't have to make a monthly loan payment which can be particularly important if the business doesn't initially generate a profit. This in turn, gives you the freedom to channel more money into your growing business.

Why would a company choose debt over equity financing? ›

Reasons why companies might elect to use debt rather than equity financing include: A loan does not provide an ownership stake and, so, does not cause dilution to the owners' equity position in the business. Debt can be a less expensive source of growth capital if the Company is growing at a high rate.

Which type of private equity strategy is most likely used to finance a start up company? ›

One of the most common VC investment strategies is Seed funding or Series A funding where the PE investors are now stepping in. Seed Capital or Seed funding is the type of financing which is essentially used for the formation of a startup.

Why should a company choose PE over a mortgage or loan? ›

Why should a company choose PE over a mortgage or loan? The interest rates are much lower than those of a mortgage. The PEI, contrary to a Bank, will not intervene in case a company does not meet its covenants. Besides the provision of financial aid, the PEI becomes an active owner of the company.

What is the difference between hedge funds and private equity? ›

Key Differences Between Private Equity and Hedge Funds

Private equity funds invest in companies that can provide higher profits over a more extended period. In contrast, hedge funds are used to invest in assets that yield good ROI or return on investment over a shorter period.

What is a disadvantage of equity financing? ›

The major drawback of equity financing is that it requires business owners to relinquish a portion of their ownership and control. If the business becomes lucrative and successful in the future, a portion of the earnings must be distributed to shareholders in the form of dividends.

Is equity financing a capital expenditure? ›

Debt financing is considered capital expenditure, while equity financing is considered revenue expenditure.

What is structured equity financing? ›

Structured equity investments make up the middle of the capital stack, falling between common equity and debt. These investments generally have lower risk than common equity, but they are subordinate to debt and therefore riskier than a traditional debt investment.

Which is not a source of equity financing? ›

The correct answer is e) Government grants.

In which situation would a company prefer equity financing over debt financing? ›

In the case of equity, companies can choose to pay, or not to pay dividends in accordance with their performance over the past year. This acts as a very big advantage. When a company is raising finance from debt financing, they need to arrange for collaterals.

What are the 10 sources of finance? ›

Below are many varied paths you can source funds to finance your business.
  • 1 1. Personal savings/ Owner's fund/ Owner's equity.
  • 2 2. Family and friends.
  • 3 3. Bank credit.
  • 4 4. Partnership.
  • 5 5. Money Lenders.
  • 6 6. Angel investors.
  • 7 7. Venture Capitalist.
  • 8 8. Customers.

What are the three main sources of financing for any firm? ›

The three major sources of corporate financing are retained earnings, debt capital, and equity capital.

What are the different types of finance? ›

The finance field includes three main subcategories: personal finance, corporate finance, and public (government) finance. Consumers and businesses use financial services to acquire financial goods and achieve financial goals.

What is the difference between funding and financing? ›

Financing and Funding

When it comes to infrastructure investment, these are two separate concepts. Financing is defined as the act of obtaining or furnishing money or capital for a purchase or enterprise. Funding is defined as money provided, especially by an organization or government, for a particular purpose.

What are the 7 sources of finance? ›

Here's an overview of seven typical sources of financing for start-ups:
  • Personal investment. When starting a business, your first investor should be yourself—either with your own cash or with collateral on your assets. ...
  • Love money. ...
  • Venture capital. ...
  • Angels. ...
  • Business incubators. ...
  • Government grants and subsidies. ...
  • Bank loans.

What are the two main types of financing for companies? ›

External sources of financing fall into two main categories: equity financing, which is funding given in exchange for partial ownership and future profits; and debt financing, which is money that must be repaid, usually with interest.

What are the 4 common sources of financing? ›

The common financing sources used in developing economies can be classified into four categories: Family and Friends, Equity Providers, Debt Providers and Institutional Investors.

Is personal funds a form of equity financing? ›

Sources of Equity Financing

New business owners typically invest their own funds into their businesses. These funds often are gleaned from inheritance, savings, or even the sale of personal assets, which then serves as equity financing for the business.

Who is an angel in equity financing? ›

What Is an Angel Investor? Angel investors are wealthy private investors focused on financing small business ventures in exchange for equity. Unlike a venture capital firm that uses an investment fund, angels use their own net worth.

What four factors should companies consider in choosing the right financing? ›

  • 4 FACTORS TO CONSIDER WHEN CHOOSING A SOURCE OF FINANCE IN BUSINESS. Below are some of the factors that we should consider before deciding on a source that most suits our business needs.
  • 1) Risk. Risk is an important element to consider. ...
  • 2) Cost. ...
  • 3) Control. ...
  • 4) Long term versus short term borrowing.

What four factors affect a company's financing plans? ›

Commercial lenders will typically look at these four aspects of your business.
...
4 factors that could affect financing your start-up
  • Your professional profile. ...
  • Your project's viability. ...
  • Your financial strength. ...
  • Your guarantee.

What should managers consider when making the decision whether to finance internally or externally? ›

Internal factors affecting financial decisions include nature of the business, the size of business, expected return, the cost and risk involved, the asset structure of the business, the structure of ownership, the expectations of investors, the age of the firm, the liquidity in company funds and its working capital ...

Why do firms generally prefer to borrow funds to obtain long term financing rather than issue shares of stock? ›

1. Issuing shares of stock can take much more time to obtain long-term financing. 2. Borrowing funds means debt on the firms, the firms can repay the debts if the cash flow from business operations is timely.

Why is equity financing more expensive than debt? ›

Equity capital reflects ownership while debt capital reflects an obligation. Typically, the cost of equity exceeds the cost of debt. The risk to shareholders is greater than to lenders since payment on a debt is required by law regardless of a company's profit margins.

When should it be preferable to use equity for an acquisition? ›

When looking to acquire a business, companies may choose equity if the target company is in a volatile industry or does not have a steady cash flow. Because equity financing does not have payment deadlines or expectations, it is also more flexible than the alternatives.

Why is debt cheaper than equity financing? ›

Debt is cheaper than Equity because interest paid on Debt is tax-deductible, and lenders' expected returns are lower than those of equity investors (shareholders). The risk and potential returns of Debt are both lower.

What does WACC stand for? ›

The weighted average cost of capital (WACC) is the average rate that a business pays to finance its assets. It is calculated by averaging the rate of all of the company's sources of capital (both debt and equity), weighted by the proportion of each component.

What are the three main differences between debt and equity? ›

Differences between Debt and Equity Capital
Debt CapitalEquity Capital
Definition
Debt Capital is of three types: Term Loans Debentures BondsEquity Capital is of two types: Equity Shares Preference Shares
Risk of the Investor
Debt Capital is a low-risk investmentEquity Capital is a high-risk investment
12 more rows

What is dry powder in private equity? ›

At venture capital and private equity firms, “dry powder” is cash that's been committed by investors but has yet to be allocated to a specific investment. This term dates back to the 1600s, when it referred to stashes of reserved (and still-dry) gunpowder that could be accessed during combat.

What happens when your company is bought by private equity? ›

When they do buy companies outright it's known as a buyout. Using a combination of their own resources and debt, the latter of which is generally piled onto the target company's balance sheet, private equity companies acquire struggling companies and add them to their portfolio of holdings.

What is the difference between venture capital and private equity? ›

Private equity is capital invested in a company or other entity that is not publicly listed or traded. Venture capital is funding given to startups or other young businesses that show potential for long-term growth.

Why do investment bankers go to private equity? ›

Private equity associates are usually older individuals who started out and were successful in investment banking in their earlier years. While there is sometimes quicker money to be made in investment banking, usually associates in private equity have higher salaries and make more in the long term.

Why is seed financing very risky? ›

Seed financing is the riskiest form of investing. It involves investing in a company in its earliest stage of development, far before it generates revenues or profits. Due to such reasons, venture capitalists or banks usually avoid seed financing.

Do private equity firms issue bonds? ›

Key Takeaways. Privately held companies do not fall under SEC regulation since they do not issue publicly traded securities. As a result, private companies cannot issue convertible bonds that are tradeable and which convert into common stock.

Who makes more money PE or hedge fund? ›

Hedge fund compensation is more variable than private equity salaries + bonuses, but at the junior levels, you'll most likely earn a bit more in private equity. At the top levels, a star hedge fund PM who has a great year could easily earn more than an MD in private equity – depending on the fund size and structure.

Who invests in private equity funds? ›

Who can invest? A private equity fund is typically open only to accredited investors and qualified clients. Accredited investors and qualified clients include institutional investors, such as insurance companies, university endowments and pension funds, and high income and net worth individuals.

How much do you need to start a private equity firm? ›

Another important factor to consider is a firm's minimum investment requirement. Historically, the standard minimum investment amount for private equity has been $25 million.

What are advantages of equity financing? ›

With equity financing, there is no loan to repay. The business doesn't have to make a monthly loan payment which can be particularly important if the business doesn't initially generate a profit. This in turn, gives you the freedom to channel more money into your growing business.

Why do stock companies prefer equity financing? ›

The main benefit of equity financing is that funds need not be repaid. However, equity financing is not the "no-strings-attached" solution it may seem. Shareholders purchase stock with the understanding that they then own a small stake in the business.

What is equity financing in real estate? ›

Equity financing is an arrangement between the CRE owner/investor and investors that contribute cash towards the purchase of the property in exchange for equity share in the property. Equity financing can be 100% or just a portion of the financing if you combine it with debt financing or your own funds.

What is the risk of equity financing? ›

Equity Financing Risk of Ownership Loss

That's because investors fund the business in exchange for shares in your company, and those shares represent an ownership stake in the business. If a business raises too much equity capital, it risks losing control of the company.

What are the major sources of equity financing? ›

Sources of equity finance
  • Self-funding. Often called 'bootstrapping', self-funding is often the first step in seeking finance. ...
  • Family or friends. ...
  • Private investors. ...
  • Venture capitalists. ...
  • Stock market.
1 Mar 2022

Why equity financing is more expensive? ›

The Cost of Equity is generally higher than the Cost of Debt since equity investors take on more risk when purchasing a company's stock as opposed to a company's bond.

Which is better equity financing or debt financing? ›

In general, taking on debt financing is almost always a better move than giving away equity in your business. By giving away equity, you are giving up some—possibly all—control of your company. You're also complicating future decision-making by involving investors.

Why do private equity firms use debt? ›

Why Do PE Firms Use So Much Leverage? Simply put, the use of leverage (debt) enhances expected returns to the private equity firm. By putting in as little of their own money as possible, PE firms can achieve a large return on equity (ROE) and internal rate of return (IRR), assuming all goes according to plan.

What are the four types of debt financing? ›

Debt Financing via Bank Loans: Bank loan is the most common type of debt financing. Bank loans can be: Secured Loans. Unsecured Loans.
...
Debt Financing can be funded by:
  • Bank Loans.
  • Bonds.
  • Debentures.
  • Bearer Bonds.
15 Oct 2020

What does WACC stand for? ›

The weighted average cost of capital (WACC) is the average rate that a business pays to finance its assets. It is calculated by averaging the rate of all of the company's sources of capital (both debt and equity), weighted by the proportion of each component.

Is real estate private equity? ›

If you're familiar with traditional private equity, real estate private equity is the same, but with buildings. As the “private” in “private equity” suggests, these firms raise capital from private investors and deploy that capital to make investments in real estate.

Is equity financing revenue expenditure? ›

Debt financing is considered capital expenditure, while equity financing is considered revenue expenditure.

What is the difference between equity and debt investment? ›

The difference between the two comes from where the money is invested. While debt funds invest in fixed income securities, equity funds invest predominantly in equity share and related securities.

Why equity is more expensive than debt? ›

Equity capital reflects ownership while debt capital reflects an obligation. Typically, the cost of equity exceeds the cost of debt. The risk to shareholders is greater than to lenders since payment on a debt is required by law regardless of a company's profit margins.

What is structured equity financing? ›

Structured equity investments make up the middle of the capital stack, falling between common equity and debt. These investments generally have lower risk than common equity, but they are subordinate to debt and therefore riskier than a traditional debt investment.

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4. Debt vs. Equity Analysis: How to Advise Companies on Financing
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