Case Study: Disruption Without a Theme – Capital Solutions
Executive Summary
Project Sage, Project Lego, and Project Navy have little in common on the surface. None is a technology investment, and none would ordinarily be described as disruptive. Yet each exists for essentially the same reason: a legitimate financing need did not fit comfortably within the traditional banking system.
Together, they illustrate a less visible form of disruption. As banks increasingly concentrate their capital on standardized forms of lending, more complicated situations are migrating to private capital. For investors able to source, underwrite and structure these types of transactions, that complexity can create compelling risk-adjusted return opportunities. These have a role to play in portfolio construction they are uncorrelated to the traditional equities and bonds markets
Disruption Has a Marketing Problem
Within investing, disruption is usually understood through themes such as artificial intelligence, frontier technologies, healthcare innovation and energy transition. The investment process begins by identifying structural change and allocating capital toward the companies expected to benefit from it.
There is nothing wrong with this approach. Many of the most consequential businesses of the past two decades emerged from precisely these tailwinds.
A theme tells us what a company does, but says very little about how that company is financed. Some of the most interesting changes in the current cycles are within the financing of increasingly complicated businesses.
Not every disruptive investment is an investment in something disruptive.
Why the Banks Stepped Back
The conventional explanation is that banks became more cautious after the financial crisis. The more important change, however, was regulatory.
Banks lend primarily with depositors’ money and are therefore required to maintain a cushion of shareholder capital against potential losses. Under Basel III, the amount of capital required depends on the regulatory risk weighting assigned to the assets a bank holds.
The important consequence is that capital for bespoke financing has become an increasingly scarce resource. Every prospective loan competes for it, encouraging banks to favour lending that is standardized, repeatable and efficient to underwrite.
What gets left behind is not necessarily the riskiest lending, but it is often the most complicated.
A corporate reorganization, a pre-construction financing or an asset whose value is intertwined with a license or patent may be perfectly sound economically while fitting poorly within a bank’s conventional lending model.
Into that gap has moved private capital, where investors are willing to provide bespoke financing arrangements to address a specific capital need,: prepared to structure the instrument, negotiate the protections and hold assets that are difficult to standardize or syndicate. The industry calls these transactions “capital solutions”.
Three Problems, Three Solutions
The following transactions were independently underwritten across different sectors and jurisdictions. They were not assembled around a theme. The commonality only became apparent afterwards.
Project Sage: The Bank Stays, the Risk Leaves
A US regional bank had developed a successful senior-housing lending business, providing bridge financing until borrowers could obtain permanent government-insured financing. The constraint was not the underlying credit. Each new loan simply consumed regulatory capital the bank believed could be better deployed elsewhere.
Rather than sell the loans and lose the associated client relationships, the bank purchased protection against losses on a portfolio it continued to own and service. Richter Family Office (Richter) clients, alongside a specialist manager, provided that protection in exchange for a contractual monthly premium.
What attracted Richter was the relationship between the return and the conservatism of the underwriting. The investment offered a contractual 15.25% annual premium over short-term rates, paid monthly in cash, while the underwriting analysis assumed recoveries materially below historical experience, extended duration and severe default scenarios. Even under those stresses, the downside appeared relatively contained based on our analysis. We believed this created an attractive asymmetry, a return approaching equity-like levels without requiring an equity-like outcome from the underlying assets.
Project Lego: The Financing No Lender Offers
A founder-owned European industrial group contained two very different businesses: a profitable intellectual-property licensing operation and a manufacturing company requiring growth capital. The founder wanted to separate the businesses and fund the expansion without surrendering control.
The solution was a structured preferred investment carrying a fixed coupon, supported by substantial collateral protection and warrants providing participation in the manufacturing company’s potential upside.
What attracted Richter was the asymmetry between downside protection and return potential. At underwriting, the investment was expected to generate returns in the mid-teens, supported by a 10% preferred coupon, while ranking ahead of the founder’s equity and benefiting from more than 5x collateral coverage at underwriting. The warrants provided additional upside, but that upside was not required to make the investment compelling. We saw the opportunity to earn an equity-like return while investing through a substantially more protected part of the capital structure.
Project Navy: The Loan That Bridges a Permission
A U.S. company undertaking a large-scale real estate development project required interim financing to fund pre-development costs before permanent financing could be arranged. The company’s operations depended on a regulatory license that was considered a key project asset.
The resulting financing was a first-lien, senior-secured loan against the project entity, including a mortgage over the land and a pledge of the entity holding the regulatory license.
For Richter, the attraction was a high contractual return over a relatively short period with meaningful collateral protection. At the time of investment, the transaction targeted a 12.1% net IRR over an expected 18 months, with monthly interest at SOFR plus 8.5% and a 3.25% floor. Estimated collateral coverage was approximately 2.2x in the base case and approximately 1.1x in the manager’s distressed-sale scenario. Richter believed investors were being well compensated for accepting refinancing, execution and illiquidity risk, while first-lien security was intended to provide downside protection if the expected exit did not occur as planned.
What the Three Have in Common
A bank capital transaction, a founder recapitalization and a pre-construction bridge appear to have little in common. Yet,each originated from essentially the same problem.
The underlying financing need was legitimate, and the obstacle was structural due to a regulatory capital constraint, the absence of a suitable lending product or a timing gap between two financings. In each case, the investor was being compensated principally for absorbing complexity, rather than taking a conventional view on economic growth.
The investment propositions themselves were different:
Sage: An attractive spread for conservatively underwritten credit risk.
Lego: Equity-like return with structural downside protection.
Navy: High contractual yield for short-duration refinancing and complexity risk.
What connected them was how those expected returns were created.
Easier to Describe Than to Access
The growth of private capital does not necessarily make these opportunities broadly accessible.
Capital solutions are typically bilateral and capacity constrained. Borrowers want a small number of counterparties that understand the transaction, so allocations often follow established relationships rather than simply available capital.
They also move quickly. More importantly, they are difficult to underwrite. There may be no market price, public research or directly comparable transaction. Collateral values, security interests, covenants and alignment therefore matter enormously.
This leads to an important distinction given that the protections are the investment. The yield is what investors are paid for understanding them.
What This Represents
Within a goals-based portfolio, disruption is generally where a family accepts greater illiquidity and concentration in exchange for exposure to structural change. The mistake is assuming that structural change will always announce itself by sector.
Project Sage, Project Lego and Project Navy are not thematic investments. Instead, they illustrate how the machinery of corporate finance is changing as complicated situations migrate away from traditional banks and toward private capital.
That creates an opportunity, but also a governance challenge. These investments are illiquid, individually negotiated and difficult to reverse. The work therefore has to be done before capital is committed.
This is why investment governance matters. Not because it allows a family to chase opportunities faster, but because it puts the family in a position to recognize, evaluate and act on an opportunity when one appears.
The most interesting forms of disruption are not always the easiest to see, or the easiest to access.
Key Takeaways
- Disruption is not only a theme. Structural change is occurring in how businesses are financed as well as in what they build. A portfolio that defines disruption solely by sector risks missing it.
- Banks have retreated from complexity, not simply risk. Regulatory capital and standardized underwriting increasingly favour conventional lending. Complicated but otherwise attractive situations are creating opportunities for private capital.
- Access remains scarce. These transactions are bilateral, capacity constrained and often fast moving. Participation depends on relationships, underwriting capability and the ability to evaluate protections that are negotiated rather than published.
Important Note: The investments discussed above remain outstanding. Any references to returns, yields, or investment outcomes are based on contractual terms, underwriting assumptions and expectations at the time of investment and do not represent realized investor returns. Private capital investments involve risk, may be illiquid for extended periods, and may not be suitable for all investors. The investments discussed above were selected solely to illustrate the theme of private capital and capital solutions investing and are not intended to be representative of all investments considered, recommended or made on behalf of clients. Investors should carefully consider their objectives, risk tolerance and circumstances, together with their professional advisors, before making any investment decision.
Frequently Asked Questions
What is a capital solution?
A privately negotiated financing designed for a situation that conventional bank or public-market products do not adequately address. The instrument is structured around the problem rather than selected from a standard menu.
What is capital adequacy, and why does it matter?
Capital adequacy requires banks to maintain shareholder capital against the risks they assume. Because different assets consume different amounts of that capital, banks have an economic incentive to favour lending that uses their balance sheet efficiently. That can leave more complicated financing needs to private capital.
Why are these investments considered uncorrelated?
Their returns depend primarily on a specific borrower, collateral pool or financing outcome rather than public equity market direction. Within a diversified portfolio, they therefore represent a distinct source of return.
Why does manager selection matter?
In bilateral transactions, there is limited public information and often no observable market price. The manager sources the investment, underwrites the risk and negotiates the protections that determine what happens when things go wrong. The manager is therefore not simply a means of accessing the investment. The quality of the manager is part of the investment itself.
The Richter Business | Family Office group is comprised of Richter LLP and its subsidiary, RFO Capital Inc., a registered portfolio manager, investment fund manager and exempt market dealer. Richter LLP is an independent firm that provides family office, accounting, tax and business consulting services, with wealth, investment advisory, portfolio management, investment fund management, exempt market dealer and consolidated wealth reporting services provided via RFO Capital Inc.