Capital Stack
The capital stack is the hierarchy of financing in a company, defining priority of claims in cash flow and distress.
Definition
Definition The capital stack ranks securities by seniority: senior secured debt, subordinated debt, preferred equity, common equity, and other instruments. Seniority determines payment priority and recovery outcomes in distress. In private markets, understanding the capital stack is essential because return and risk depend on where an investment sits and what protections exist. Allocator Context Allocators evaluate capital stack exposure to understand downside. A strategy investing in junior positions may offer higher returns but faces higher loss severity. In private credit, capital stack positioning—combined with covenants and collateral—drives expected recovery in default scenarios. Decision Authority Capital stack risk affects how strategies are classified within sleeves and risk budgets. Committees often require clarity on where the strategy sits in the stack and how that exposure behaves under stress. Why It Matters for Fundraising Managers gain credibility by being precise about capital stack positioning and recovery logic. LPs trust managers who can explain downside protections clearly, not just headline yields. Key Takeaways Defines seniority and recovery outcomes Downside depends on position, covenants, and collateral Drives risk classification and sizing constraints Clear capital stack explanations improve diligence outcomes