QUESTIONS
Equity and credit
Ownership and lending allocate economic participation, decision rights and risk in different ways.
Equity represents an ownership interest in a business or asset. Its value depends on operating performance, capital needs, market conditions and the price at which that interest can ultimately be realized. Ownership rights may include participation in decisions, distributions or a future sale, as defined in the relevant documents.
Credit creates a contractual obligation to repay. The analysis centers on the source of repayment, the borrower's other obligations and the protections available if payment is not made. Security, covenants and payment priority can affect a lender's position, but a contractual obligation does not guarantee repayment.
The distinction is not always absolute. Preferred equity, convertible instruments and other negotiated structures may combine features associated with both ownership and credit. The documents and the underlying economics matter more than the label alone.
Questions that clarify the difference
Source of value
Is the investment case based primarily on ownership appreciation, contractual payments or a combination?
Rights and obligations
Who controls key decisions, who must provide further capital and where does the investment sit in the payment order?
Downside and liquidity
What happens if the plan underperforms, and how could the investment be sold, repaid or otherwise realized?