The Evolving Capital Stack: Strategic Approaches to Complex Transactions

Evolving market conditions are fundamentally reshaping 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 projects 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 assessment of borrowers. As a result, investors financing greenfield projects and less proven projects (such as novel energy transition or digital infrastructure concepts) 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 approaches – 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 creativity of the parties.

The Modern Capital Stack

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, distributing proceeds to investors according to the fund’s waterfall, net of management fees.

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 strategic 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 capital 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 strategic 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 capital burden and execution risk, club deals allow sponsors 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 partners 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 or technical expertise to pursue these opportunities. These strategic partnerships are essential in sectors like infrastructure, real estate and platform-building, where project execution is complex, where proprietary IP and expensive, specialised assets are prevalent, and where capital requirements are significant. JVs allow each partner to contribute different strengths, such as operational expertise, market knowledge, or specialised skills or assets. For instance, in July 2025, Energy Capital Partners, KKR and CyrusOne formed a JV to build out a 190 MW data centre campus in Bosque County, Texas, the first of a USD50 billion strategic partnership between ECP and KKR to support AI infrastructure in the United States.

Co-investments

Co-investments are when a limited partner invests directly or indirectly into a specific deal alongside a lead sponsor, typically at a reduced or no management fee and without being burdened by the sponsor’s carried interest. The sponsor generally retains control over governance and operations, while the limited partner gains direct exposure to the asset. Co-investments allow limited partners to selectively increase exposure to deals they find attractive without committing additional capital to the entire fund managed by the lead sponsor. For sponsors, bringing in co-investors enables them to pursue larger or more expensive deals without over-concentrating their fund’s capital, while also providing the opportunity to deepen strategic relationships with investors and pitch the limited partner on future opportunities. Over the past decade, these have become a significantly more prevalent form of fundraising. According to PitchBook data, in 2010, co-investment funds raised USD4.3 billion across all sectors, as compared to a record USD33.2 billion in 2024 across only 40 vehicles.

Direct lending

Direct lending provides an alternative to conventional debt financing in which a non-bank lender (such as a debt fund) provides debt capital directly to sponsors or portfolio companies, allowing sponsors to bypass the traditional syndicated bank loan process, and offering flexibility, speed and greater certainty compared to traditional syndicated loans. These factors are critical for larger or more complex transactions in capital-intensive sectors such as energy and digital infrastructure, where timing and execution are critical. Showing the strength of direct lending, in July 2025, Legal & General, a British investment firm, partnered with Blackstone to deploy up to USD20 billion via private credit markets.

Hybrid equity

Hybrid instruments – like preferred equity, convertible debt and other combination instruments – sit between pure debt and equity. For sponsors, hybrid equity offers a mechanism to fill a financing gap without diluting control as much as common equity would, while still providing investors with a return profile that may participate in the upside but also carries downside protections that are not offered in a true “equity” situation. For companies receiving these investments, this can often be the most “expensive” form of solution for capital needs, as the sponsor receives the upside of equity and the downside protection of debt, so these solutions are often used by companies that may not have the required asset backing to make other solutions possible (early-stage infrastructure projects, for example). For instance, in 2025, Captona made a USD243 million preferred equity investment in esVolta in order to support development of 1GWh of BESS capacity in the ERCOT market.

Core Negotiating and Transaction Considerations

Complex capital structures require careful attention to many critical elements, regardless of the specific solution being pursued: (i) governance rights; (ii) financial terms; (iii) exit considerations; (iv) information rights; and (v) regulatory and tax matters.

Governance rights

Allocation of governance rights and protections is critical for the adequate protection of an investment and a driver for its success. In large project structures, governance can range from (i) a sponsor-controlled board with broad authority over all decisions, to (ii) a strategic JV in which the management team runs day-to-day operations while the sponsor retains consent rights over fundamental milestones, project decisions or entry into critical contracts, to (iii) a club deal with true 50:50 control. Alternatively, a co-investment is often passive in control rights unless the co-investor’s investment is significant enough to justify a board seat or veto rights over certain fundamental decisions. Direct lending substitutes operational control for contractual protections through security interests and affirmative and negative covenants in regard to certain financial metrics or key business activities of the company.

As part of these governance structures, sophisticated investors also plan for downside scenarios. For example, investors often ensure that developer-controlled projects include step-in mechanisms to flip governance control from a developer to a major investor or combination of the other investors upon missed milestones, events of default, failures to exit or other agreed adverse events.

Financial terms

These instruments’ financial terms can be flexible to the desires of the parties and the commercial profile of the investment, and must balance investor protections in the distribution waterfall, liability allocation and capital contributions with the company’s or project’s capital requirements and risk profile.

While “all common” structures remain standard in JVs, convertible and preferred equity structures are increasingly used to mitigate early-stage downside risk, especially for investments in development-stage projects. Sponsors can find comfort in the risk-mitigation mechanics of preferred equity that mimic features of debt finance, such as fixed coupon returns, “first-out” preferred returns in the distribution waterfall, and anti-dilution mechanics to secure its option for equity-like upside upon an optional conversion into common equity. Preferred equity can be structured to remain in place until an exit; however, in the context of large greenfield project development, it has become common to have convertible preferred units that convert (either automatically or at the option of the sponsor) to common units upon substantial completion of construction, because once the project reaches substantial completion, the risks that initially justified the preferred equity structure will have been materially reduced.

In true co-investments, the most common scenario is for the co-investor to push to receive the same treatment of equity as the sponsor and to ensure that their interests are pari passu in all economic scenarios, as the most important factor for most co-investors is ensuring their interests are aligned with the sponsor.

In direct lending, returns come from interest, which may be a fixed amount or a floating rate tied to an index such as SOFR or some other measure. Direct lending has a more limited upside than the other instruments discussed here, but the lender receives greater security for its loan via priority returns (ahead of any hybrid, preferred or traditional equity) and collateral security in the project or company.

In multi-layer capital stacks, cross-default and acceleration provisions require careful drafting to craft solutions that allow parties to correct issues and to avoid a “race to the exit”, and to carefully resolve the implications of these items. It is also becoming common for any “governance flip” or “step-in” rights to be triggered if the project or company defaults under a credit facility or other material contract.

In arranging the economics and governance terms of the various instruments and securities, parties must also ensure that the respective elements are structured in a manner that achieves the debt and equity treatment desired by the parties from an accounting perspective, which may be influenced by governance and economic protections, especially certainty of return of capital and levels of control of the business.

Exit considerations

Exit mechanisms for any of these complex capital structures should reflect both the project’s likely path to liquidity and the relationships (and differences) among the investors in the capital stack. The relevant considerations will vary depending on the type of instrument being used. In JVs, where certain investors are bringing capital to a management-driven project, financial investors may ask for a put right or tag right if the manager exits, in order to provide an exit ramp if the initial operational team the investor trusted to develop the project is no longer the development partner. Similarly, in a co-investment, the co-investor often requires tag-along rights or co-sale rights tied to a sale by the sponsor in order to align its incentives and exit opportunities with the sponsor, whose larger, controlling stake in the company is typically more liquid and more valuable on its own than the co-investor’s minority stake. Conversely, the sponsor that brought in the co-investor may request a drag-along right on the minority interests held by the co-investor so that it has more flexibility when marketing its interests in the company to potential buyers. Direct lenders will also want to consider what exit scenarios, such as a sale or an IPO of the project or the company, should trigger mandatory repayment of the loan. Hybrid equityholders follow a similar line of thinking to a JV partner, and will usually request a tag right in the event of an exit, and will also want to ensure that they have conversion rights that allow them to achieve liquidity if other investors or management are exiting at a desired value. In all of these scenarios, the individual transferability of the investment is also a negotiating item, as investors can sometimes be subject to lock-up periods or restrictions on when and how they can conduct a transfer.

Pre-emption rights on new issuances of equity are another key variable in these transactions, especially in the area of infrastructure projects where cost overruns are common and subsequent capital contributions and commitments are often required. For example, if a project is anticipated to require additional funding to reach completion, an investor may not be able to have consent over future funding rounds, but may have pre-emption rights regarding the issuance and rights regarding the seniority of the interests created in order to allow the company to continue to obtain funding. In considering these situations, pre-emptive rights must be designed to balance anti-dilution protection with the company’s funding flexibility.

When an IPO is a possible exit strategy, advanced planning is required to simplify the capital stack, determine registration rights post-IPO and determine post-IPO governance among the key equityholders.

Information rights

Robust information rights for non-operational investors are important for visibility to enforce their other rights. It has become common to see information rights beyond basic financial reporting, including regular project updates, copies of material correspondence and key operational data, to assist the investor’s monitoring of the assets and operations. Other rights such as audit rights and board or committee observer seats also help investors stay up to date with the operations of the company or project.

Regulatory and tax considerations

Control rights, exit provisions, information sharing and investor composition can trigger antitrust filings or other regulatory approvals. Even though direct lending is less likely to raise such issues, covenant packages may require reporting. Tax structuring should ensure the arrangement delivers the intended economic result without unintended inefficiencies or accounting complications. In focusing on the go-forward operations and returns of the investment, parties must be sure to consider these regulatory and tax matters when structuring the transaction at the outset.

Practical Tips for Negotiating and Structuring Complex Capital Structures

Align early on governance and exit strategy

As with all companies and projects, understanding the governance and exit strategies that will be in place is a core component of efficiently negotiating and transacting, but these considerations are heightened in a multi-investor structure where each investor is coming in with differing instruments that have varying priority, economic rights and governance rights. As a result, early alignment on the terms of governance and the likely exit strategy helps avoid costly renegotiations and ensures commercial alignment before incurring significant costs and expenses.

Integrate commercial roles with governance

Unlike a full buyout transaction, relationships in these ventures will carry on long after closing. Vague letters of intent or exhibits that attach high-level terms for commercial understandings to be fully negotiated later may unlock the ability to document the transaction, but fully negotiating any required commercial terms (such as supply agreements, service contracts or other contracts where one partner will be providing some sort of commercial product or service to the company, the project or other investors) in parallel to the negotiation of the partnership agreement will resolve material issues on the front end and help avoid subsequent misalignment and disputes after the project is already under way.

Address conflicts of interest and future opportunities upfront

Sponsors, investors, management and the company must define how potential opportunities will be shared (or excluded) among the parties. These provisions should consider not only “true” contractual conflicts of interest but also those that may be implied by the competitive landscape, to ensure that conflicts are appropriately considered. When appropriate, information barriers may also be required, not only for competitive information but also to align with existing regulatory or antitrust requirements.

Conclusion

The evolution of complex capital structures reflects a market necessity and a strategic opportunity for sponsors, developers and investors. Rising capital costs, constrained credit, and the escalating scale of infrastructure and other large-scale projects have pushed market participants towards flexible, multi-layered funding arrangements. Whether through club deals, JVs, co-investments, direct lending or hybrid equity, these structures allow parties to bridge capital gaps, share risk and align strategic interests in ways the traditional private equity model cannot always accommodate.

Yet the benefits of these arrangements hinge on careful structuring. Governance rights must balance effective oversight with operational efficiency, financial terms should align incentives while protecting downside risk, and exit provisions need to reflect both the anticipated life cycle of the asset and the realities of multiparty ownership. Regulatory and tax considerations are not afterthoughts either, shaping how control can be exercised and how returns are realised.

Success in this environment depends on early alignment among stakeholders, integration of commercial roles with governance, and clear protocols for managing future opportunities, conflicts and information flows. In complex, multi-investor settings, these steps are critical to preserving relationships and protecting value over the life of the investment.

As infrastructure and other capital-intensive sectors continue to evolve, the ability to craft bespoke, resilient capital stacks will remain a competitive differentiator. The most successful participants will be those who not only understand the menu of structural options, but can adapt and combine them creatively to meet the demands of each transaction – recognising that in today’s market, financial structuring is as much about strategic alignment as it is about capital itself.