Markets and economies move up and down. But no matter where they are in the cycle, companies will always need capital—whether it’s to spur growth, shore up their defenses or access liquidity to support their corporate initiatives (see Figure 1).
Flexible capital is a global, all-weather solution that sits between traditional private credit and traditional private equity. The key is customization: A company teams up with a strategic partner who provides alternative sources of capital to help execute its vision.
For investors, it combines the essential elements of both debt and equity in a hybrid, tailored investment structure with a focus on strong downside mitigation, along with upside potential tied to equity performance.
Since the Global Financial Crisis, it has been more difficult for companies to access traditional forms of capital. Private markets increasingly have filled the void. The U.S. private credit market, for example, reached $1.7 trillion in 2023, comparable to the U.S. leveraged loan and high yield markets (see Figure 2).1 In 2025, private credit is estimated to total about $2 trillion globally, though one estimate placed the market closer to $3 trillion.2
Companies can also turn to the private equity markets, but doing so means that the management team would need to dilute its equity ownership of the business. Not to mention that the cost of capital tends to be more expensive, especially if the market timing means that management needs to issue equity well below the company's intrinsic value.
In this financing environment, flexible capital solutions have emerged as a strong alternative for companies with specific needs.
Structured capital solutions span the middle ground between debt and equity (see Figure 3). And because they are customized through a negotiation process, each structured capital solution is unique.
A more debt-like instrument, such as preferred stock plus warrants, can be used to right-size a company’s leverage, while giving the capital provider downside mitigation over other equity owners.
This downside mitigation is based on the risk level of the provider’s capital—in other words, a higher position in the capital stack. For example, if the capital provider’s last-dollar loan-to-value ratio is 60% of a company’s total enterprise value, 40% of the value could erode from that business, but the capital provider would still get its last dollar out.
In a debt-like investment, most of the capital provider’s return comes from consistent preferred equity dividends, which tend to be higher than those for a more equity-like structured instrument. Meanwhile, the warrants offer some additional upside to the underlying preferred return if the long-term equity story for that business plays out.
This type of debt investment often saves the capital provider and the target company from having to agree on a valuation for the business. This helps facilitate transactions where valuation expectations between the two parties are not aligned.
Alternatively, a capital provider investing in a more equity-like instrument, like a convertible preferred, inherently believes that the underlying equity value of a business will grow materially over the long term. This equity-like investment would have a lower running cost of capital but would generate a higher amount of the overall return from the equity component.
This allows the capital provider to support the company’s growth strategy while participating in its share of the business’s profitability. These types of solutions tend to work well for a misunderstood, dislocated business, where the capital provider and the counterparty roughly agree on where the valuation lives. In other words, structured capital can reduce the market timing risk found in traditional private equity by offering a premium valuation in exchange for downside mitigation.
Today, structured capital solutions are essentially another capital source for both public and private companies to choose from. But importantly, they are more flexible than other options. They can:
As a result, structured capital solutions appeal to a wide variety of companies. These can include private, founder- or management-owned businesses that want to maintain control and ownership of the business along with the potential upside, private-equity-backed companies where the sponsor is looking for access to incremental capital, and more.
Flexible capital offers an attractive solution for companies and investors alike—and expands the universe of solutions across private credit and private equity.
Companies today are looking for meaningful capital and partnership, without having to take on more debt or dilute their equity ownership. As corporate boards and management teams become more sophisticated and comfortable with assessing possible financing options, more are seeking out new types of solutions.
For the investor, flexible and strategic capital solutions cover an attractive middle ground between debt and equity. Since part or all of the return is contractual, these investments can include downside protection with more upside exposure than traditional debt. And since these transactions are often highly negotiated, the inclusion of other protective features—like board seats or consent rights—only enhances the appeal of the asset class to investors. Capital providers can assist in influencing a company’s overall strategy without taking full control—and help drive great outcomes.
Disclosures
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This commentary contains information and views as of the date indicated and such information and views are subject to change without notice. Certain of the information provided herein has been prepared based on Brookfield's internal research and certain information is based on various assumptions made by Brookfield, any of which may prove to be incorrect. Brookfield may have not verified (and disclaims any obligation to verify) the accuracy or completeness of any information included herein including information that has been provided by third parties and you cannot rely on Brookfield as having verified such information. The information provided herein reflects Brookfield's perspectives and beliefs.
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Endnotes:
1. U.S. Federal Reserve, “Private Credit: Characteristics and Risks,” February 23, 2024. The Fed cites Preqin for data on private credit.
2. McKinsey & Company, “The next era of private credit,” September 24, 2024; EY, Alternative Investment Management Association, “Financing the Economy: The Future of Private Credit.”
