In what way can private equity influence a company's capital structure?

Private equity can significantly influence a company's capital structure primarily through the restructuring of the mix of equity and debt. This process involves adjusting how much funding comes from debt (loans, bonds) versus equity (investments from shareholders).

When private equity firms invest in a company, they often employ leverage — using borrowed funds to finance the acquisition. This can lead to a higher proportion of debt relative to equity in the company’s capital structure. The goal is to enhance returns on equity for investors, as the use of debt financing can amplify profits. Additionally, private equity may contribute to refinancing existing debt or altering the terms of debt agreements to improve cash flows and reduce financial burdens on the company.

Through these actions, private equity firms not only alter the financial leverage of the company but also can impact its operational strategies by dictating how funds are used for growth or restructuring. This influence on the capital structure is critical for achieving the firm's performance targets and ensuring a suitable return on investment upon exit.