Borrow or sell a stake: weighing the shape of a raise

Start with cash flow. Debt has to be serviced on a fixed timetable, whatever happens to trading. A business with stable, predictable cash generation, contracted revenue or tangible assets can usually carry some borrowing. A business that is loss-making, early in its growth or exposed to volatile demand will struggle to meet repayments, and lenders will either price that risk heavily or decline. Equity carries no repayment schedule, which is why it suits periods of heavy investment and uncertainty.

Consider the purpose and the true cost. Funding a specific asset, an acquisition with clear earnings or working capital tends to suit debt. Funding product development, entry into a new market or a turnaround tends to suit equity. Debt usually looks cheaper, because the return to the lender is fixed and interest is often tax-deductible. Equity is generally the more expensive capital over time, since investors share in all future value, but it absorbs losses and leaves the business room to manoeuvre.

Think about control. Lenders take security and covenants rather than ownership, and their influence grows mainly when things go wrong. Equity investors take a share of the company and usually ask for board representation, consent rights over major decisions and regular information. Some founders prefer a lender's covenants to an investor's seat at the table. Others value an investor who brings relationships and patience.

Hybrids fill the space between. Convertible notes or loans start as debt and convert into equity at a later round, often at a discount, which defers the valuation discussion. Preferred equity ranks ahead of ordinary shares for dividends and on exit, giving investors downside protection while often allowing a lower level of dilution than a straight equity round. Mezzanine finance sits between senior debt and equity, carries a higher return than senior lending and often includes warrants. Hybrids can be efficient, but their terms deserve close reading, because conversion mechanics, ratchets and preferences decide who receives what in a difficult outcome.

What lenders ask. A lender's questions centre on repayment. Lenders want to know how much cash the business generates after its essential costs and how stable that cash is, what assets or contracts can be offered as security, and what existing borrowing ranks ahead. They will test what happens to cash flow if revenue falls sharply for a year, and which covenants the business can meet with comfortable headroom. A business that has answered these questions for itself, with numbers it can defend, will have a far more productive first meeting.

What equity investors ask. Equity investors focus on growth and exit. They want to understand how large the business can become and what it needs to get there, how the valuation was reached, what rights they will have as a minority holder, who else is on the register and whether those shareholders will support future rounds, and how and when they might realise a return. Gulf family offices often add questions about the relationship itself: how much access they will have to management, whether co-investment will be offered in later rounds and how the company will report to them.

How Gulf investors view each. Gulf allocators invest across the capital structure. UBS's Global Family Office Report 2026 found that Middle East family offices held 5% of their strategic allocation in private debt in 2025, the highest of any region surveyed, against a 3% global average. The region's sovereign funds have built substantial credit businesses of their own, Mubadala's among them, and partner with global managers on lending strategies, as Mubadala did with Fortress Investment Group in a US$1 billion private credit and asset-based lending partnership in April 2025. Many Gulf family offices also back growth equity, often with co-investment rights and close contact with management. Structured instruments such as preferred equity are familiar to many of these investors, who tend to value downside protection alongside upside.

Discipline is expected on either side. Moody's notes that as more capital enters GCC private credit, managers will need conservative borrowing levels, strong covenant protection and thorough borrower assessment. UBS reports that family offices are paying closer attention to liquidity, valuation uncertainty and concentration risk. For a business, the practical point is that Gulf appetite for private debt does not mean looser terms. A credit proposal will be underwritten carefully, and an equity proposal will be tested on valuation and governance.

Shariah-compliant alternatives. For investors who follow Shariah principles strictly, interest-bearing debt is excluded, and some conventional preferred structures raise similar questions. Ordinary equity is generally more compatible, provided the business does not operate in prohibited sectors such as alcohol, gambling or conventional interest-based finance. Debt-like funding can be built from sale, lease or partnership contracts: murabaha, a cost-plus sale with deferred payment; ijara, a lease; or musharaka, a partnership in which the financier shares the risk. In a commodity murabaha, for example, the financier buys an asset at market cost and sells it to the business at cost plus a disclosed, fixed profit, which the business pays in instalments. The return is a trade profit rather than interest. A Shariah board or adviser reviews the structure, and some income may need to be purified.

Why this widens the pool. The Islamic Financial Services Board puts global Islamic finance assets at US$4.4 trillion in 2025, up 13.4% on the year, with the GCC holding more than half. Some Gulf banks, insurers and family offices with strict Shariah requirements simply cannot invest in a conventional loan or certain preferred shares. A Western business that can accommodate compliant structures widens the pool of Gulf capital it can approach, provided the structure is designed in early with qualified Shariah and legal advice. Retrofitting a structure late in a raise rarely works.

A worked example. Consider two hypothetical London businesses, each seeking EUR 15 million. The first is a profitable operator with long contracts and property assets, looking to fund expansion it has already scoped. It might combine EUR 10 million of senior debt, possibly structured as murabaha or ijara for Shariah-led investors, with EUR 5 million of equity to keep borrowing at a level it can service in a weak year. The second is growing quickly but not yet profitable. Debt would strain it, so it might raise equity, perhaps with a convertible element for an investor who wants some protection, and revisit debt once cash flow is established.

Common mistakes. Businesses borrow against forecasts rather than current cash flow, then breach covenants in the first difficult quarter. They accept a low headline valuation in a preferred round without modelling how the preference plays out on a modest exit. They treat Shariah compatibility as a paperwork exercise at the end of a process. They raise equity for a purpose that debt would fund more cheaply, or debt for a purpose that only equity can carry. Each mistake is easier to avoid at the outset than to repair later.

Choosing in practice. Many raises end up as a blend: equity to fund growth, a modest facility for working capital, perhaps a hybrid to bridge the two. The aim is a structure the business can sustain in a weak year as well as a good one. Wrotham Partners advises on both equity and debt raises from the Gulf, and the first conversation on a mandate is usually about this question, well before any investor is approached.