Where to Invest in the Capital Stack?
I’m looking for a structured framework or decision-making process for determining where to invest within a company’s capital stack. Specifically, I’m interested in how to decide between positions like first-lien, second-lien, mezzanine debt, preferred equity, and common equity.
Key factors I’m considering:
- Risk tolerance and how it influences debt vs. equity positions
- Expected cash flow stability and how it impacts the choice of secured vs. unsecured debt
- The role of market conditions, especially interest rates, in prioritizing different levels
- Covenant structures and how they might sway investment decisions in various layers of the stack
- Recovery scenarios and how to model potential outcomes in distressed situations
If you have a method, checklist, or framework that helps in assessing these aspects—or any resources like case studies, white papers, or textbooks that cover this topic in depth i'd be very grateful.
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