4 Major Benefits of a Larger Capital Stack

Posted on: June 12th, 2019

Benefits of a Larger Capital Stack

Capital stack is destiny in the deal world, and bigger is usually better. In any situation, to be able to add more stack, and be multi-levelled is usually a smart move. Extra layers allow you do things you ordinarily cannot do – to fund the unexpected, to scale- up, to grow at a faster rate. Sometime, buyers ignore the basic rules of capital stack and try to do things on a shoe string budget. This can pose a big challenge to a successful closing. It can also significantly impede the company’s ability to invest in the business post-closing.

Adding more capital stack to your deal is like having a liquidity insurance policy that ensures you are well funded regardless of what transpires. Extra capital stack usually adds additional expense to your deal and can result in lower returns for the buyer. Instead of a buyer having a 25% IRR they make only have a 20% IRR if they add additional capital to the budget. This type of thinking is pervasive in the deal world, where financial engineering driven viewpoints prevail.

The question is not one of cost but rather the value of the extra capital stack.Extra stack gives you capital bandwidth and muscle, and lets you do things you simply could not do with a traditional capital structure. It transforms the game from focusing on debt servicing to one of bold investing in your future growth. Here are the Attract Capital 4 major benefits of a larger capital stack:

Creates product growth – great innovations often emerge as product line extensions in the margins of emerging market need. Often, companies don’t invest in these areas simply because they don’t have the budget. Proactive investment in upgrading and extending product line can create huge growth value.
Provides Market Share Gains – Better capitalized companies have the ability to strike quickly and take opportunistic advantage of market disequilibrium. It can be an acquisition or hiring a strong sales team from a competitor.
Provides Upgraded Technology and Systems– highly leveraged acquisitions usually lack extra capital to invest in upgrading the infrastructure. With better systems in place, you will be able to scale more rapidly and drive new customer acquisition growth.
Reduces reliance on vendors – capital constrained businesses usually over rely on whatever available sources of credit are available. If you have tapped out your line of credit, it is tempting to squeeze your vendors to get by. This is a short term game at best, and can be a serious threat to your business over the long term.

In the acquisition financing arena, capital availability is destiny as companies require reliable access to capital to grow over the long term. Unforeseen capital needs usually arise when acquirers least expect it. This can cause some concern for the acquisition financing provider, especially when covenants tighten up and that working capital availability is utilized faster than expected.

Mezzanine debt borrowing is usually a straightforward activity that many companies use for funding of transitional growth. Mezzanine debt lenders are highly transparent about their due diligence approach and their post-closing loan management making it easy for companies to engage with.

Elections have consequences and positive ones at that for the acquisition financing middle market. While much media attention is paid to the direction of the yield curve and the Fed’s likely rate cuts, scant attention is paid to the more important drivers of the acquisition financing market – business psychology and regulatory climate.