BOSTON-Debt and equity are separate components to the capitalization of a deal, but they are hardly independent. Each component cannot be sourced in a “vacuum” and then neatly combined at closing. We spoke with Adam Steinberg, managing director of Ackman-Ziff's Boston office, for tips on blending these two pieces.

Step 1: Determine the best time to commence the capital raise.

For acquisitions it is almost always best to begin both immediately due to time constraints, Steinberg says, while for developments, it may be best to start with equity if the deal is more than three months from being shovel-ready.

“While most equity investors want to invest upon construction commencement they will underwrite a transaction in its mid-predevelopment period, roughly six to nine months before construction commencement.”

Step 2: Use the feedback from equity investors to help secure a lender and/or improve the deal (most relevant for development deals).

The primary goal, of course, is to select an equity partner, Steinberg says, “but a secondary goal is for the developer to learn as much as possible from investor feedback to potentially improve the project and/or mitigate any concerns. Lenders respond best to late-predevelopment period projects with an identified equity partner or, alternatively, a group of interested equity investors from which to select an equity partner.”

Step 3: Determine the acceptable amount of leverage for the equity investor.

Understanding the acceptable ranges early is critical to properly coordinating the capitalization of a deal, Steinberg says. “For example, even if 80% leverage is available most equity funds/investors do not want that much leverage and the returns must be enticing at more traditional levels of 65-75% leverage. Some pension funds, insurance companies and foreign investors have a relatively lower threshold for leverage at 50-60% and compensate by seeking moderate leveraged returns. Initial equity investor interest may in fact guide initial discussions with lenders.”

Step 4: Play it close to the vest until it is beneficial to share progress on the capital raise.

Updates to the other capital component should not be provided until there is positive and meaningful information to share, Steinberg says. “Sharing too early may lead to questions about whether there is sufficient interest in the deal or why a particular group passed on the deal.” Another point to consider, he adds: detailed lender information should only be shared when an equity source has expressed strong interest. Otherwise, if the would-be partner is just “fishing” for information it could create unwanted competition.

Instant Insights /

How to Marry Your Debt and Equity in 4 Steps

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