Cost & Value

The goal is to get to the finish line with a large exit value. Often cost of capital is a barrier because mezzanine debt and private equity pricing is viewed as too expensive. It is very important to have a growth capital structure that will unleash a company's growth potential. The traditional way to measure the cost of growth capital is to look at the weighted average cost of each layer of capital. The goal in many deals is to minimize the weighted average cost of capital which involves maximizing senior and mezzanine debt. Surely, ROI economics are more favorable with lower cost capital. However, the true cost of debt is not solely reflected in the interest rate. Too much debt results in a loss of operational flexibility and can significantly diminish a company's range of strategic options. Cost matters but the value of each layer is even more important. Mezzanine debt and equity cost more than senior debt but they are much more valuable than senior debt in a capital structure. A business can grow more rapidly, more safely with a higher degree of operational flexibility with mezzanine debt and equity. Assessing "Structure Value" is key to designing a growth capital structure. A breakdown of the cost and value of different layers is as follows:

For companies that need a longer term, and more flexible capital structure, mezzanine debt and equity layers are vital ingredients. For companies that require less flexibility, more senior debt can be used. The saying "you get what you pay for" is very much the case in designing a sensible growth capital structure. While you pay more for mezzanine debt and equity, you certainly get more safety and stability and an overall higher structure value. Structure value is very important when assessing the right type of capital for your business. We have historically found that the cost of capital is of secondary importance to the overall quantity and flexibility of capital. Most successful growth companies have an abundance of flexible growth capital at their disposal.