Lincoln International’s Tactical Software Playbook provides a roadmap on how to execute a deleveraging transaction to pay down debt or execute a recapitalization.

Structured Capital: A Creative Solution

Structured capital offers a creative solution for software companies grappling with over-leveraged balance sheets or seeking to return capital to shareholders. Unlike traditional debt, structured capital instruments—such as preferred equity or Holdco PIK notes—provide flexibility to de-lever (or assist with a recapitalization) without requiring cash pay interest or traditional financial covenants, and have the additional benefit of limited dilution to common equity holders. However, the process of executing such a transaction requires significant planning and knowledge of the investors operating in this niche area of the market. In addition, software companies must meet a certain group of key criteria prior to embarking on such a transaction. Lincoln International’s dedicated team of bankers hold deep sector experience in the software industry, as well as extensive knowledge of the capital markets.

Our Tactical Software Playbook provides a roadmap on how to execute these deleveraging and recapitalization transactions alongside our expert advisory services.

Step 1: Identifying Qualifying Pre-Conditions

Before embarking on a structured capital transaction, it’s critical to ensure the company meets specific financial and operational benchmarks. Investors in structured capital instruments look for clear indicators of growth and stability, even if the company is currently under financial pressure.

Step 2: Key Marketing Document Development

Meticulous preparation is the cornerstone of a successful structured capital transaction, which typically requires at least one month of work prior to launching a transaction. For software companies, this phase is critical to translating complex financial metrics—such as ARR growth and retention rates—into a compelling narrative for potential investors.

By addressing sector-specific nuances upfront, software companies can significantly improve their odds of securing favorable terms and attracting the right investors. Key deliverables include:

Step 3: Investor Targeting

Finding the right investor is a critical step in any structured capital transaction. The software sector’s reliance on ARR-based business models means investors must have a deep understanding of recurring revenue metrics and the nuances of high-growth companies.

Structured capital instruments tend to be bespoke, requiring detailed intelligence about what each investor is willing to do from a structural perspective. Target investor classes include:

Step 4: Syndication

After distributing marketing deliverables to a targeted investor group, the next step is to carefully review all submitted Indications of Interest (IOIs) and narrow the pool to those most closely aligned with the financing objectives of the transaction. IOIs typically outline preliminary terms, indicative pricing, covenant expectations and a proposed deal timeline, which provide key decision points for management teams to evaluate.

Selected investors will then participate in a series of organized management presentations (MPs), designed to provide deeper insights into the company’s strategy, operations and financials.

Following these presentations, investors will conduct further due diligence with access to a secure data room and other materials to support their final investment committee process. It is important to note that due diligence for structured capital transactions is typically longer than a traditional senior debt placement.

At the end of this process, final investors are invited to submit Letters of Intent (LOIs). The management team and advisors will then select a single investor (or group of investors, if applicable) to move forward with documentation and finalize the transaction.