Private Equity Deal Structure: A Practical Guide

Tenet Equity

June 9, 2026

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8 min read

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For business owners and executives evaluating a capital transaction, whether a sale, a recapitalization, or a sale-leaseback, understanding the basic frameworks private equity firms use is a useful foundation for any informed conversation with a capital partner.

The Capital Stack

Every business acquisition is funded by a combination of capital sources arranged in a hierarchy called the capital stack. That hierarchy determines the order in which investors are repaid and the level of risk each party assumes.

Senior debt sits at the bottom of the stack and carries the lowest risk. It is typically provided by banks or institutional lenders and has the first claim on the company's assets and cash flow.
Mezzanine debt or preferred equity occupies the middle layer. It is subordinate to senior debt and bridges the gap between the senior loan and the equity contributed by the sponsor. It carries a higher cost than senior debt to compensate for the additional risk, but is less expensive than common equity.
Common equity is the capital contributed by the private equity firm and any joint venture partners. Equity holders are last to be repaid, which makes this the highest-risk position, but also the one with the greatest upside once debt and preferred equity obligations are satisfied.

Common Deal Structure Models

Most private equity transactions fall into a few established frameworks. The right structure depends on the asset type, risk profile, and the sponsor's investment thesis.

Leveraged buyout (LBO). In an LBO, a private equity firm acquires a company using a significant amount of senior & mezzanine debt, minimizing the equity it needs to contribute. When companies own commercial real estate, a sale leaseback transaction may be considered as an additional source of capital used to facilitate a transaction. The triple net lease vs. gross lease guide explains how different lease types affect cash flow predictability and ability to attract investors.

Joint venture (JV). A PE fund acts as the capital partner, providing the majority of equity, while an operating partner with specialized expertise manages the business being acquired. The JV agreement defines responsibilities and establishes a profit-sharing waterfall that dictates how cash flow is distributed after defined return hurdles are met.

Recapitalization. For operating companies that own real estate, a recapitalization restructures the balance sheet rather than selling the entire enterprise. A capital partner injects equity to buy out existing shareholders, fund growth, or reduce debt, often in combination with other financing tools, such as a sale-leaseback transaction. The corporate recapitalizations page covers how this plays out in practice for middle-market businesses.

How Owned Corporate Real Estate Fits In

For middle-market companies, owned real estate is a significant but often underutilized asset within a broader capital transaction. A sale-leaseback is one of the more efficient ways to unlock that value. The company sells its property to a capital partner and simultaneously signs a long-term lease, converting a fixed asset into liquid capital without interrupting operations.

In an acquisition context, for example, a manufacturing company might execute a sale-leaseback on its production facility and use the proceeds as the equity contribution for an M&A transaction reducing the amount of new equity or debt required to close the deal. The resulting lease, typically structured as a triple net agreement, provides a predictable occupancy expense for the operator and a stable income stream for the investor. The single-tenant NNN lease guide covers how these leases are structured and what operators should expect over the lease term.

Key Takeaways

The capital stack organizes all funding sources from lowest risk (senior debt) to highest risk (common equity), with repayment priority following the same order.
Leveraged buyouts, joint ventures, and recapitalizations are the most common private equity deal structures, each suited to different asset types and investment objectives.
For operating companies that own real estate, a sale-leaseback can convert an illiquid fixed asset into growth capital without adding debt or giving up operational control.

Frequently Asked Questions

What is a capital stack in a private equity deal? A capital stack is the combination of funding sources used to finance an M&A transaction, arranged by repayment priority. It typically includes senior debt at the base, mezzanine debt or preferred equity in the middle, and common equity at the top. Each layer carries a different level of risk and a corresponding expected return.

How does a leveraged buyout work? An LBO involves an acquisition using a high ratio of debt relative to equity. The sponsor's returns are amplified by the leverage. The goal is to grow equity value by paying down debt and improving EBITDA before the business is sold.

What is the difference between a joint venture and a recapitalization? A joint venture is a partnership formed to acquire and manage a business, where a capital partner and an operating partner share responsibilities and economics under a defined agreement. A recapitalization restructures an existing company's balance sheet by introducing new capital to change the mix of debt and equity — often to buy out shareholders or fund a specific business objective.

What is preferred equity? Preferred equity sits between senior debt and common equity in the capital stack. It receives a fixed return before common equity holders participate in profits, making it lower risk than common equity but with less upside. It is typically used to bridge the gap between what a senior lender will provide and the total capital required for a transaction.

Why would a private equity firm use a sale-leaseback as part of a deal structure? When acquiring an operating business that owns its real estate, a PE firm may use a sale-leaseback to monetize the property and reduce the total equity or debt required to close the transaction. The company sells its real estate and leases it back, with the sale proceeds effectively funding a portion of the acquisition — making the overall deal more capital-efficient.

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