Capital Stack

Represents all the capital invested in a company. The capital stack provides a comprehensive view of the company’s financial structure and sets out the order of priority for claims on its cash flows, which is vital for assessing risk and potential returns.

• Common equity is considered the top and riskiest layer of the capital stack. It carries the greatest risk because investment agreements entitle every other tranche of capital to be repaid before common equity holders. However, it is potentially the most rewarding layer since returns are not capped.

• Preferred equity is an equity investment that is superior in interest to common equity but subordinate to debt. Technically, it is an equity security, but it shares many characteristics with debt instruments, such as offering reoccurring, fixed-income payments. However, this type of stock gives shareholders less voting power and has less earning potential.

• Mezzanine debt, positioned second to senior debt in the order of payment priority, plays a unique role in the capital stack. After all operating expenses and the senior debt payment have been made, any excess cash will be used to service the mezzanine debt. This type of debt typically offers a higher return rate than senior debt but lower than equity, making it an attractive option for certain investors.

• Senior debt has priority over all other positions in the capital stack. In other words, senior debt lenders must be paid before any other investor can receive a return on their investment. Investors who are risk averse will likely want to invest in the lower portion of the stack, which has lower returns and lower risk. Those comfortable with higher risk levels and want a higher return will want to focus on the top of the capital stack.