Capital Structure: Conclusion

Knowing that the ability to access capital directly affects the value of a business, owner managers find it urgent to understand the ramifications of this value‐capitalization relationship in the private capital markets. Furthering the discussion upon the fundamental concepts underlying the capitalization of private businesses, this chapter explores the cause, effect and remedy of certain issues such as: (1) Capital providers use credit boxes and other devices to manage risk and return in their portfolios (2) Expected returns to institutional capital providers comprise the PPCML (3) Private cost of capital emanates from the private capital markets (4) High cost of capital limits private company value creation (5) Intermediation is relatively ineffective in the middle market and (6) Capitalization is triangulated to valuation and business transfer. The choice of capital structure matters to a private company. It directly influences a company's ability to create shareholder value because the balance sheet sets the minimum threshold for a company's cost of capital. Investments in the business must meet this threshold, or value is destroyed.