Capital Stack

Capital Stack is defined as the depiction of the full sum of capital that is invested in a project, which includes pure debt, hybrid debt, and equity. Capital stack is arranged in the following manner:

Ø Sponsor equity

Ø Preferred equity

Ø Mezzanine investors (hybrid debt and equity)

Ø Second and other junior mortgages

Ø Investment-grade first mortgages

Capital Stack is one of the most useful instruments used by investors for assessing the risk in real estate investments.

When evaluating capital stack, we generally follow this guide map:

 

  1.   Each capital source has superiority over all capital sources placed above it in the capital stack.
  2.   Each capital source is less important than all the capital sources placed below it in the capital stack.
  3.   The topmost stack has the highest risk degree, which lessens as we move down the stack.
  4.   While trading or refinancing, the bottom position gets funded first until fully repaid and so on.
  5.   If the fund is inadequate to fully repay all capital, then losses are suffered from the top down.
  6.   This implies that both risks, as well as returns, escalate as you move higher in the capital stack.
  7.   Sponsor co-investments are the highest-paid as equity at the peak position in the capital stack.

This help page and the information contained herein is provided for informational and discussion purposes only and is not intended to be a recommendation for any investment or other advice of any kind, and shall not constitute or imply any offer to purchase, sell or hold any security or to enter into or engage in any type of transaction.

Investing in venture capital funds is inherently risky and illiquid. It involves a high degree of risk and is suitable only for sophisticated and qualified investors.