When we focus in on financial investors, we're talking about capital allocators in the sense of taking cash and investing it in a specific structure. We'll typically defer to the phrase "businesses" as the end asset that you invest in, but these can be functioning businesses, startups, properties, etc. Value-creating assets. The way that investors fund these businesses can generally be looked at in two buckets: Debt and equity.
Investing in a company in exchange for equity means that investors get a percentage of whatever the outcome is.
- Who extends debt capital?
- Why do they? Because this is how they make money. They take Capital from consumers and pay them interest in the hopes of getting a higher return on their end
- What's their strategy? Extremely conservative. Since their returns are a lot lower, they can’t afford many losses. This is why they get seniority in liquidation and access to collateral.
- This is a two-edged sword because the seniority and collateral is what allows them to give you access to capital at a really cheap price. If you take equity, your new investor gets a share of every dollar earned.