Disentangling Capital Structure from Price

Read more from Jamie Finney from Innovative Finanace Newsletter

This article discusses the complex relationship between the cost of capital and its structure, emphasizing the need for innovation in financing and portfolio construction. It highlights that the traditional view of debt and equity, as low-risk and high-risk respectively, is overly simplistic. Examples include high-risk payday loans and conservative equity investments by hedge funds. The author argues for a more nuanced understanding of capital products, acknowledging that both debt and equity can span the entire risk-reward spectrum. The article also touches on the challenges small businesses face in securing financing, the lack of diversity in venture capital portfolios, and the need for banks to update their lending criteria. The concept of “appropriate capital” is introduced, advocating for a capital structure that aligns with the business’s needs and objectives, not just its cost. The piece concludes with a call for a broader perspective on finance, beyond traditional debt and equity, to address structural capital gaps and offer more tailored solutions.

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