Layer 3 – Equity
Equity is provided by independent funds and is provided on a multiple of EBITDA valuation basis. As the bottom of the layer structure, it is the riskiest and most expensive layer of capital. Equity is generally priced at 30%+ per annum. It receives no current payment in interest so all of its return is realized on the back end through capital appreciation of its shares. Standard equity valuation is 5 to 8 times EBITDA. Equity has the longest term of all of the layers in the 3 layer cake. There is no obligation on the part of the business to repay the principal unlike a loan. Due to the riskiness of this layer being at the bottom of the cake and having no contractual right to repayment, equity is very expensive capital and usually ends of with greater than 50% of the shares in the company. Because equity providers own a large piece of the business, they are perfectly aligned with the risk reward profile as the business owner. It is in their own interest to promote growth of the business and to facilitate corporate growth through providing follow-on capital if warranted.