Moving from equity to debt in co-investments
Built on Chapter 12 of The Single Family Office by Richard C. Wilson. Full chapter text: FamilyOffices.com.
Most families that start co-investing do it in equity. Over time, many get offered debt deals too: senior loans, mezzanine pieces, or project notes alongside an equity partner. Debt can be a great fit for family money. It can also burn a family that treats it like equity with a coupon attached.
Why debt appeals to families
Debt pays from the start. A family does not have to wait years for a sale to see cash come back. Debt also sits ahead of equity if a company fails, and well-secured lenders usually recover at least part of their money.
For families that value steady income and protection of capital, those are strong draws. Debt can also be a way to back a partner or an industry the family likes without taking on full equity risk.
Why it is harder than it looks
An experienced family office executive I spoke with gave a clear warning. Be very careful when you move from equity investing to debt. The debt markets have their own rules and traps. Many investors who rushed into debt during past credit crunches learned this the hard way.
The skills are different. Equity investors focus on upside and growth. Lenders focus on what can go wrong and how they get paid back when it does. Covenants and collateral, plus the fine print of default terms, matter far more than the growth story.
Get the right person on the team
If your family wants to do debt co-investments, make sure someone on the team has real lending experience. That person should help set covenants, judge collateral, and read the intercreditor terms that decide who gets paid first.
If no one inside has that skill, hire an outside advisor for each deal until the family builds its own.
Price debt to the risk
One energy family I know prices its loans to match the stage of a project. In the earliest, riskiest phase it lends at a high rate. As the project proves itself and other lenders join, the rate steps down in later phases. That approach rewards the family for taking early risk and invites cheaper money once the risk is lower.
Watch the structure
Debt co-investments can come in many forms. Some families lend directly. Others invest through a vehicle run by a lead manager. Each choice changes who controls the loan if things go wrong.
Ask a few questions before you commit. Who decides whether to enforce the loan? Where does your piece rank against other lenders? What collateral backs it, and who holds it? Can terms be changed without your consent?
Know when equity is better
Debt is not always the right choice. Its upside is capped. If you believe strongly in a company's growth, equity or a convertible note may suit you better. Many families mix the two, holding some debt for income and a small equity stake for upside.
Avoid outside variables where you can
The same executive also urged caution on deals that depend on government subsidies or pending approvals. A lender cannot control a regulator. Fewer outside variables mean a cleaner loan and fewer surprises.
What to take from this
- Treat debt as its own discipline, with experts who have lent through at least one hard credit cycle.
- Price each loan to the risk of the stage it funds.
- Know exactly where your piece ranks and who controls enforcement.
- Mix debt and equity when you want both income and upside.
This page is general information, not legal or investment advice. Speak with an experienced finance attorney before any debt investment.
Questions and answers
Why do family offices like debt investments? They pay income early and rank ahead of equity if a company fails.
What is the main risk of moving into debt? Treating it like equity and missing the details of covenants and collateral.
Who should be on the team for debt deals? Someone with real lending experience, inside the family office or as an outside advisor.
Should families avoid subsidy-dependent deals? Where possible, yes. They add variables a lender cannot control.