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I may as well have brought a begging bowl with me.

Here I was. Sitting in a meeting room of the surprisingly modest offices of this hedge fund. I was here to meet the Principal of the private credit arm.

Our business had a dreadful twelve months through a combination of ugly macro impacts and some internal operational issues. We’d lifted the nose of the airplane now, but we’d nuked a hole in the balance sheet through our cash burn of the last 12 months.

And now we didn’t have the liquidity to trade through a seasonal working capital outflow.

We were a million miles from any conventional funding options. We’d hired an investment bank to help us find a private credit lender to give an emergency loan. We’d approached more than 20, and now we were down to just this one lender. Who had quoted terms at an IRR of nearly 20%.

We were deep in the shit. And now we had one final drink at the last chance saloon.

We had no choice other than to take this god awful money. Paying a credit card cost of capital (minus the air miles). But it wasn’t just that, the security and covenant package they were demanding was brutal, so much so that it would also piss all of our other lenders off.

I’d hoped we might be able to negotiate some better terms. But we had zero leverage. I just didn’t know whether he knew that.

But it didn’t take long to get my answer…

Patrick Bateman soon walked in with a big grin on his face. And it was clear immediately that he knew he had us over a barrel.

I felt like I was in a car wreck, and this guy was the lawyer who somehow showed up before the paramedics. Like he already KNEW it was going to happen.

Guess we were going to have to take our medicine and reflect on what we could learn.

And as I did that, it was clear to me that the problem went back, way back. We’d been stuck with our current capital structure for many years. And with our business underperforming, we had not had enough CFADS (cashflow available for debt servicing) to actually refinance on market terms at this time.

So we were locked into an unsuitable, inflexible capital structure that was not fit for our current operation, or today’s macro environment.

And that inflexibility had left us in a state of capital desperation. And pushed us into the ready and waiting arms of a vulture.

Now we had to make this deal with the devil count. Execute our turnaround, improve our CFADS, and get ourselves to a point where we could recapitalize the business on our own terms…

Time to get to work.

Welcome to a new series of CFO Secrets Playbooks. This month, we have a five-part series breaking down how to capital structure design.

Fundraising for CFOs has been my most requested topic for some time. It's finally time. But we can't cover it all in a single month. So we'll break it down into two parts. This month, we will cover designing the capital structure, and in a future series (early next year), we'll cover executing that design.

But as ever, we'll start with the fundamentals.

You would have learned in college that capital structure refers to the specific mix of various forms of debt and equity used to finance a business.

And technically, this is correct.

But just because it's correct doesn't mean it's useful.

Funding options have evolved substantially. There is now a seemingly bottomless range of options for companies at different stages of the lifecycle: venture debt, merchant trade finance, and private credit are just a few examples of recent innovations in capital.

Now there is a complex map of funding possibilities available to the modern CFO.

Each of them carries its own quirks, and terms that extend well beyond simply whether they are debt or equity and what the cost of funds is. So we need a modern, practical playbook for CFO fundraising.

And that’s what we will start this week…

You will commonly hear that good capital structure design is downstream from a good strategy. And while the sentiment is right, it doesn’t go far enough for my liking.

Capital structure is strategy. And strategy is capital structure. They are inseparable.

And a broken capital structure is a broken strategy. Having a brilliant plan that can’t get the right funding to make it work in the real world is simply not a brilliant plan.

This will only become more true as we move to a world where AI and automation swap labor out for capital. increasing operating leverage. And putting more complex J-curve dynamics into businesses and requiring more creative funding solutions.

In this world, business strategies will become more tied to how they are funded.

Let’s kick things offwith a cautionary tale…

Carillion was once the UK’s second-largest construction and facilities business, with sales of over £5bn.

In January 2018, it collapsed into compulsory liquidation under the weight of its own debt. The fallout was ugly: government infrastructure projects stalled, 30,000 suppliers left unpaid, and pensioners saw their retirement promises vanish.

It was a disaster.

Yet in its final full-year accounts, Carillion reported net debt of just £219 million against EBITDA of £274 million. A leverage ratio of 0.8x. On paper, this looked like an investment-grade credit.

So how did it blow up?

There are plenty of answers to that. It’s a case study in governance failure, aggressive accounting, and optimistic contract bidding. But at the heart of it all was a grotesque failure of capital structure design. (And remember what I said: capital structure is strategy. And vice versa.)

So, where did it go wrong?

In 2013, Carillion introduced a reverse factoring program. Under the scheme, banks would advance payment to Carillion’s suppliers, effectively letting them draw cash early against invoices issued to a 'quality' credit like Carillion. In return, Carillion could push out the suppliers payment terms with little resistance. 90 days. Then 120. In some cases, even longer. Suppliers got paid quickly, the bank funded the gap, and Carillion sat on the float.

And here’s the kicker: under GAAP, this wasn’t reportable as debt in Carillion’s accounts. It showed up as a working capital inflow. “Extended supplier terms,” nothing to see here, right? Right?!

Side note: This is another place where GAAP is letting investors down. But I’ll save that rant for another day.

Carillion got hooked. It leaned harder and harder on supplier finance. Meanwhile, its own underlying cash cycle was getting worse. WIP and receivables were ballooning as projects got delayed. Standard fare in infrastructure, but no less painful. They were stretching the working capital tail on one side and funding it with short-term supplier credit on the other.

Eventually, the music stopped. In mid-2017, Carillion started to hit credit limits across the various funding lines. The working capital engine seized. By the time it folded, Carillion had racked up over £700 million in reverse factoring. Adjusted for that, their true leverage was closer to 4x EBITDA. Not good.

Add in a pension deficit of nearly £800 million, and the whole thing detonated.

Carillion’s fatal error was treating a structural cash conversion problem like a short-term timing issue. It needed long-term funding. Instead, it got slapped on the suppliers’ ‘credit card’. A classic duration matching problem.

And when the road finally ran out...

Kaboom.

So if that’s what bad looks like, what does good capital structure design look like?

Here are the ingredients for a strong capital structure:

TLDR; there are a lot of dimensions to get right.

Capital structures typically go wrong when they focus too hard on trying to optimize one or two of these variables (often quantum of funding and cost of funds) at the expense of the others.

They want the lowest interest cost, but the covenants are too tight. Or they need passive equity for growth, but pick an investor who is looking for dividends and a board seat, just because they’ll write the biggest check.

Great capital structure design is about solving all of these problems together, and doing so in line with your strategy.

While there’s no shortage of capital structure creativity, the market isn’t as wild as it looks.

Over time, it’s naturally organized itself into funding ecosystems based on stage of business. So don’t overthink it. The simplest start point is to match your capital strategy to your company’s maturity. Swim with the tide.

But even once you are inside the right ecosystem, there are a number of dimensions to consider:

And let’s not forget the biggest variable of all. All checks are written by a human being.

Even in institutions.

And who those people are, what their motivations are, and how well you understand each other is grotesquely underconsidered by most CFOs.

We’ll be giving it plenty of consideration in this series.

Series Line Up

So let's get into what we have coming up:

Getting your capital structure right is about so much more than debt vs equity and what cost of capital is. It starts with alignment with strategy and defining the features of your business that determine your funding options.

In this series, we will break it all down with case studies, and we’ll round it off with a full walkthrough example in week 5.

Next week, we are going to get into the different capital features and how to identify them in your business.

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Disclaimer: I am not your accountant, tax advisor, lawyer, CFO, director, or friend. Well, maybe I’m your friend, but I am not any of those other things. Everything I publish represents my opinions only, not advice. Running the finances for a company is serious business, and you should take the proper advice you need.