Private Markets Community

Sharing this interesting paper: Chameleon Capital

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5331909

Abstract

Equity and debt are blurred in the private capital domain. "New" sophisticated players-private credit funds-craft bespoke blended and braided investments that this paper coins as chameleon capital. Chameleon capital includes (i) traditional and modern hybrids instruments (blended capital), or (ii) braided equity and debt investments (braided capital), or (iii) a dynamic combination of blended and braided capital used by sophisticated investors with long-term interests and calculated objectives in mind. Chameleon capital shows the reduced capacity of legal forms to deal with the complex realities of private ordering. By enabling investors to blend and braid 'equity' and 'debt', chameleon capital demonstrates that the conventional division between those categories is only relevant to bankruptcy proceedings. For a single investor, or a small group of associated/affiliated investors, such as private credit firms and private equity firms, the distinction between 'equity' and 'debt' has become further blurred and, arguably, disappears altogether as per the Modigliani-Miller theorem. Yet, the legal characterisation of what is 'equity' and what is 'debt' in law remains very important, including in bankruptcy proceedings. Chameleon capital also challenges foundations of corporate governance and corporate law-debt investors are interested in wealth maximization and corporate control when their debt instruments provide them with equity-like returns that depend on long term wealth maximization-and represents the pinnacle of how corporate finance influences corporate control. The opportunities and challenges arising from chameleon capital present global momentous possibilities, but also raise new important issues as private funds operate globally.