Recent Developments Regarding Alternative Investment Funds In Europe

Introduction

Since the turn of the millennium, there has been an increase in the variety and use of capital structures of a company. Under the well-known and widely accepted Modigliani and Miller theorem ("M-M theorem"), regulators would be able to achieve any particularly desirable mix of debt and equity in banks at negligible cost, since leverage (banks' debt: equity ratio) would then be irrelevant to lending and its pricing¹. Although it is proposed by the M-M theorem that the capital structure of a company², i.e. how the combination of debt and equity is managed, is irrelevant for the value of the firm, this classical theorem has been challenged by many other theorems, such as the 'trade-off' theory, the 'agency costs' theory, and 'pecking-order' theory (Ferran, pp. 54-56)³.