Capital that Fits: Understanding Private Market Hybrid Strategies

Introduction: Flexible capital for complex situations

A useful way to think about hybrid capital is to begin with the problem it solves. Many companies, sponsors, founders, and asset owners may need capital that is more flexible than a standard loan and less dilutive than a sale of common equity. They may be growing, transitioning, refinancing, looking to retain control or trying to unlock value in an asset whose cash flows are durable but not easily financed through traditional channels. In many cases, they are also looking for more than passive borrowing; they want a capital partner that can provide operating partnership, strategic perspective, and practical guidance to help create value over time.

Hybrid capital exists for those situations. It is not a single instrument. It may include preferred equity, structured equity, debt with equity participation, convertibles, asset-backed financings, and direct asset investments with structured economics.¹List of instrument types is non-exhaustive and provided for illustrative purposes only. What these approaches have in common is the combination of two ideas: some form of contractual or asset-based return, and some form of participation in upside. In many strategies, protection and upside involve a clear tradeoff. In hybrid capital, deals are structured so they stack rather than simply offset.

That combination matters because it creates a different risk and return dynamic. A conventional lender is paid mostly for avoiding loss. A common equity investor is paid mostly for owning the upside after everyone else has been paid. Hybrid capital asks whether the investor can negotiate enough protection to reduce the cost of being wrong, while preserving enough participation to be paid when things go right.

The answer depends less on the label and more on the structure, the counterparty, the documentation and the investment manager’s ability to execute. This memo explores where hybrid capital can fit in a portfolio, why the opportunity exists, how returns are generated, what risks deserve attention, and what capabilities are required to execute the strategy well.

1Where does hybrid capital fit?

Investment committees often begin with allocation buckets, which is understandable because buckets create discipline, benchmarks, and governance. However, some strategies are defined less by a single asset-class label than by the role they play in a portfolio. Hybrid capital is one of those strategies.

The important point is not that hybrid capital is hard to categorize. We believe the better point is that it can be useful in several categories, provided the allocator is clear about what role it is expected to play. In a Private Credit portfolio, the strategy may be valued for contractual return, seniority, collateral or downside-oriented underwriting. In a Private Equity portfolio, it may be valued for equity participation, value-creation engagement, and exposure to growth, often with shorter duration investments than traditional private equity. In an Opportunistic portfolio, it may be valued for the ability to provide flexible solution capital in complex situations.

This is why the same investment strategy can be a credit diversifier, an equity complement, and an opportunistic solution at the same time. We believe the allocation decision should therefore begin with the portfolio objective, not with a debate over taxonomy. What risk is being introduced? What return is being sought? What liquidity is being accepted? What existing exposure is being complemented or reduced? When those questions are answered clearly, hybrid capital can support a permanent allocation rather than a tactical or residual one.

For investors using a Total Portfolio Approach, the language is even more direct. Hybrid capital can be assessed by its contribution to total portfolio outcomes, such as income, downside protection, equity participation, liquidity profile, cyclicality, and manager skill. The strategy does not need to be forced into one box in order to be understood. We believe its ability to contribute across multiple portfolio objectives may support what can justify a durable, deliberate allocation to hybrid strategies.

2Why the opportunity exists

At its core, hybrid capital consists of private, negotiated transactions that fill the gap between private debt and private equity. We believe that gap is widening, creating a large and persistent need for flexible capital. Many companies and asset owners require capital that is more flexible than a standard loan and less dilutive than a sale of common equity, while relatively few capital providers are organized to deliver that capital consistently and at scale.²Source: Preqin. Data as of June 2, 2026. Represents closed-end, commingled funds raised between 2018 and 2025 with at least $100M in commitments through the final close.

We believe the demand side has both structural and cyclical drivers. Structurally, founder and family-owned businesses continue to face succession and growth questions. Corporates continue to need bespoke capital for M&A, carve-outs, and strategic transitions. Capital needs in areas such as digital infrastructure, aviation, hospitality, industrial real estate, and royalties often require financing that is more customized than a standard credit product. Meanwhile, US bank lending as a percentage of GDP has structurally declined since the 2008 Global Financial Crisis.³Source: Bank for International Settlements. US bank lending to domestic private non-financial sector as % of GDP, quarterly. These are not one-cycle phenomena; instead, we believe they reflect the recurring need for capital that sits between rigid debt and full equity control.

The supply side is equally important. Not every capital provider can respond. Banks tend to prefer standardized, lower-complexity credit. Direct lenders often focus on sponsor-backed loans with familiar documentation and leverage frameworks. Private equity funds usually require control, a larger common-equity check or a longer hold period. Even among alternative managers, we believe many participate only opportunistically or in narrow pockets of the market, rather than maintaining a dedicated, scaled hybrid capability across both corporate and asset-backed opportunities.

The result is a space where tailored capital can be valuable because the counterparty is not simply buying money; it is buying a solution. That solution-oriented alignment helps unlock the asset class’s differentiated return profile, in which the investor is being compensated not only for illiquidity, but also for complexity. Because companies and asset owners face challenges across cycles, there is a persistent need for solution-oriented capital. Recurring demand, combined with limited scaled supply, supports the long-term case for hybrid capital.

3How returns are earned

Hybrid capital returns are earned through a structural combination of protection and upside participation, which is a different payoff pattern than traditional credit or private equity. The protected component is intended to limit downside, create a path to return capital and, help shorten duration relative to traditional private equity. The participation component is intended to preserve exposure to upside if the company or asset performs well.

The attraction is that these components can stack in the same investment. The floor may reduce the severity of a bad outcome, while the participation component may prevent the investment from being capped at a lending return when things go right. That is why hybrid capital is not simply “higher-yielding credit” or “safer private equity.” Its value depends on whether the protected return is real, the upside is material, and the documentation keeps both elements intact when conditions change.

In practice, we believe hybrid capital can offer elements that private equity and direct lending typically do not provide on their own. It tends to involve more structure and shorter duration than traditional private equity, and more upside participation and operating engagement than direct lending.

A useful simplification is that hybrid capital has two return engines: corporate and asset-backed. They are related, but they are not identical. The corporate engine begins with the business itself, including its quality, cash flows, capital structure, management alignment, governance rights, and exit path. The asset-backed engine begins with the underlying asset, including its quality, contracted or durable cash flows, collateral value, the level of cushion below the investment (often called the attachment point), seniority, and the plan for managing the asset over time.

Descriptions are representative of typical characteristics and may not apply to all traditional special situations strategies. For illustrative purposes only.

The combination of the two engines matters. They diversify each other through different counterparty pools, different dislocations, and different return profiles. Across both engines, however, the return architecture is similar. The protected component may come from a coupon, preferred dividend, yield against asset cash flows, original issue discount, seniority, collateral, or discounted entry. The upside component may come from warrants, conversion rights, ownership stakes, profit participation, or asset appreciation.

4The market moments: growth, inflection and defense

In our view, hybrid capital tends to appear in three broad market moments. These moments are not rigid categories, but they are useful for understanding why counterparties seek this form of capital and why manager capability matters.

Some managers are generally built to address only one or two of these moments. Others have the broader toolkit, sourcing reach, structuring experience, and operating capability to invest across all three.

The point of the framework is not classification. It’s to show how the strategy can operate across a cycle. In benign markets, growth and inflection opportunities may dominate, as companies seek capital to expand, pursue strategic transactions, or reduce dilution. In more constrained markets, defense and liquidity solutions may become more important, as companies, sponsors, and asset owners navigate refinancing pressure, balance-sheet stress, or market dislocation. A broad hybrid platform should be able to move among these moments as the opportunity set changes, without changing the basic discipline of protecting capital first and then seeking participation in upside.

5What investors should worry about

No strategy should be evaluated only by what can go right. The more useful exercise is to ask what can go wrong, how often it might happen, and whether the structure materially changes the outcome. For hybrid capital, several concerns come up repeatedly. While reasonable, each applies most directly to an adjacent strategy that shares surface features with hybrid capital while differing structurally underneath. The risks are worth examining. In each case, an important consideration is whether the manager has stayed within the disciplines that mitigate them.

Documentation. Investors in broadly syndicated loans have increasingly faced situations in which borrowers move collateral or restructure debt in ways that disadvantage existing lenders, a practice often called a liability management exercise. These outcomes are most common in loans with weak protections or covenant-lite loans. Privately negotiated hybrid investments can reduce that exposure when protections and governance rights are written carefully. Because these transactions are generally sourced outside of competitive processes, we believe managers may also have greater ability to insist on documentation that reflects the risk being underwritten.

Many hybrid capital counterparties avoid traditional leveraged capital structures altogether, which further reduces the strategy’s exposure to the dynamics that create these risks.

Manager dispersion. Hybrid capital benefits from a structural feature that many adjacent strategies lack, which is the potential to reduce the severity of adverse outcomes relative to strategies that rely primarily on common-equity appreciation. That said, the presence of a contractual floor does not eliminate bad underwriting. It only helps if the floor is enforceable, properly attached, and supported by a business or asset that can carry the obligation. Outcomes may also depend on how effectively the manager works with the company or asset owner over time to shape strategy, improve operations, strengthen governance, and plan for exit.

Liquidity. Hybrid investments are private and illiquid. That is not a defect if the vehicle structure matches the asset structure. In our view, it becomes a problem if illiquid assets are placed inside vehicles that promise more liquidity than the assets can reasonably provide.

Duration. Hybrid investments typically have shorter hold periods than traditional private equity because capital can be returned through contractual cash components, structured exits, and refinancing dates built into the documentation.

Shorter duration can improve exit certainty at the investment level. Compared with secondaries, which depend on a market-clearing function, hybrid duration is often more contractually anchored and less dependent on third-party liquidity.

Competition. If a large amount of capital were to move into the strategy without a corresponding increase in attractive opportunities, pricing could tighten and documentation could weaken.

The counterpoint is that investing in hybrid capital at scale requires capabilities that are difficult to assemble quickly, such as structuring experience, operating expertise, a global sourcing funnel, legal discipline, and sector knowledge. We believe a key test for any manager is whether they have practical experience structuring and enforcing a wide spectrum of contractual protections across different markets, counterparties, and asset types, not just describing those protections in theory.

The lesson is not that hybrid capital avoids risk. The lesson is that the relevant risks are often different from the risks embedded in adjacent strategies. Underwriting hybrid strategies should therefore focus on the specific protections, the path to liquidity, the role of upside, and the manager’s potential to drive outcomes after closing.

6What it takes to execute well

Hybrid capital is a discipline-heavy strategy. We believe a manager must be willing to walk away if the downside protections are insufficient, if the upside is too small, if the counterparty alignment is weak, or if the legal structure does not survive stress. The four capabilities presented in the chart below are central to execution.

This combination is what separates a hybrid strategy from a collection of one-off structured investments. Relationships matter, but so do the documents. The coupon matters, but so does the business plan. The collateral matters, but so does the entry price. Upside matters, but only if it is not purchased by giving up too much protection.

7Bain Capital Special Situations

Bain Capital’s Special Situations team is positioned as a global provider of hybrid capital across corporate and asset-backed opportunities. The platform combines investment professionals across North America, Europe, and Asia with operating resources, including Special Situations’ large, dedicated Portfolio Group of operating professionals, as well as the broader Bain Capital private-markets ecosystem.⁴While Bain Capital Special Situations intends to collaborate with Bain Capital and its affiliates, there is no guarantee that Bain Capital Special Situations will be successful in doing so.

Hybrid capital strategies are typically designed to provide flexible capital to founders, sponsors, corporates, and asset owners while preserving alignment. For counterparties, this can mean access to capital and active value-creation support with less dilution than a control equity transaction. Operating resources can work alongside management teams and asset owners to help create value, bringing experience to areas such as growth initiatives, margin improvement, commercial execution, governance, and exit preparation. We believe institutional interest in hybrid capital has grown in part because these structures can provide exposure to contractual or asset-based return components alongside potential upside participation.

Conclusion: The role of hybrid capital in a private markets portfolio

Hybrid capital is best understood as flexible private capital that seeks to combine protection and participation. Because of this combination, it can fit naturally within private credit, private equity, and opportunistic allocations Each bucket sees a different part of the same strategy: the contractual or asset-based floor, the equity-linked upside, and the ability to solve complex capital needs.

Hybrid capital’s distinguishing feature, that the contractual floor and equity upside stack rather than offset, becomes most visible when allocators look at the portfolio level, rather than evaluating each asset class in isolation. Viewed this way, hybrid capital can potentially capture illiquidity and complexity premia in a structurally protected way that neither private equity nor private credit typically delivers on its own.