USA – TEXAS Trends and Developments Contributed by: David Stringer, Kyle Kreshover, Austin Johnson and Shaq R. Taylor, Clifford Chance
The Evolving Capital Stack: Strategic Approaches to Complex Transactions Evolving market conditions are fundamentally reshap - ing capital structures for acquisitions and project development. Rising interest rates, tightening credit conditions and heightened regulatory and geopolitical uncertainty are reshaping how sponsors, developers and investors raise the funding needed to move pro - jects forward. Traditional credit lines – once cheap and readily available – are now not only more expensive but also harder to secure as lenders tighten underwriting standards and prefer borrowers with strong balance sheets, representing a shift from relationship-based approvals to a more data-driven, risk-based assess - ment of borrowers. As a result, investors financing greenfield projects and less proven projects (such as novel energy transition or digital infrastructure con - cepts) may need to look outside of traditional equity and debt financing sources and structures. This shift is accelerating the rise of intricate, multi- layered capital stacks that blend co-investment, joint venture, direct lending and hybrid equity structures. While the global fundraising environment has cooled, dry powder remains abundant – creating a paradox where capital is available, but not always in the right form or at the right price, underscoring the need for creative financing. Against this backdrop, sponsors and developers are increasingly turning to bespoke structures – club deals, hybrid equity and other collaborative approach - es – tailored to the specific risks, timelines and cash flow needs of each project. This article examines the core features and negotiation points of these complex capital solutions, recognising that the only true limit is The traditional private equity structure remains the foundation of the industry: a sponsor (the general partner) raises capital from limited partners, manages the investments, and exits through a sale or IPO, dis - tributing proceeds to investors according to the fund’s waterfall, net of management fees. the creativity of the parties. The Modern Capital Stack Despite its prevalence, this model is increasingly complemented by more complex capital structures,
enhancing flexibility for both investors and sponsors. These alternative structures not only expand access to additional capital, opening opportunities for larger transactions, but also help sponsors solidify strate - gic relationships with key investors and partners and attract specialised expertise. Core capital structures: club deals, joint ventures (JVs), co-investments, direct lending and hybrid equity While each approach discussed below helps spread risk, pool expertise and assets, and unlock new capi - tal and investment opportunities, they differ markedly in several key ways, such as structure, governance, control and return allocation. Club deals Club deals involve multiple sponsors jointly acquiring a target company. These sponsors pool their equity capital, share in governance and collaborate on due diligence, with each sponsor having a voice in strate - gic decisions. Club deals are ideal for large or complex transactions that may either be beyond the financial mandates of an individual fund, or may pair a larger sponsor with one with relevant expertise in the sector, such as infrastructure, energy or digital assets, where relevant experience is critical. By spreading the capi - tal burden and execution risk, club deals allow spon - sors to combine their sector expertise and compete for complex, high-value assets. For example, in June 2023, Silver Lake, CPP Investments and other co- investors teamed up to acquire Qualtrics, the creator and leader of the experience management software category, for a total equity value of USD12.5 billion, allowing investors to leverage their complementary strengths and balance the financial commitments and risks of such a large transaction. JVs JVs are partnerships between two or more parties, which can include a mix of sponsors, limited part - ners and strategic investors, to create an entity for a specific investment. Unlike club deals, JVs are often established for a series of investments or for long-term development projects, and can function as a platform for sponsors to provide required capital and to pool assets and IP with strategic partners or management teams that have the industry relationships and sector
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