Newsletter-21

243 CAPITAL MARKETS LAW Recent Developments Regarding Alternative Investment Funds in Europe* Att. Ekin Ersanli 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 desir- able mix of debt and equity in banks at negligible cost, since leverage (banks’ debt: equity ratio) would then be irrelevant to lending and its pricing 1 . Although it is proposed by the M-M theorem that the capital structure of a company 2 , 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 . Alternative investment vehicles have recently been more popular, especially in terms of the private equity and the leveraged finance mar- kets, notably after the rather abrupt entrenchment in the marketplace due to the credit crunch of the 2007-2008 crises (Yates & Hinchliffe, p.170) 4 . This increase in popularity gave rise to a need in the regulation * Article of December 2016 1 FSAMaterials: Discussion Papers and Feedback > 2009 > Discussion Paper 09/2: Financial Services Authority A regulatory response to the global banking crisis > Annex 1 The costs and benefits of regulatory capital requirements > The Modigli- ani-Miller Theorem (Accessed on 29/12/2016 through Lexis Library database). 2 Miller M. and Modigliani , F, ‘The cost of capital, corporation finance, and the theory of investment’, The American Economic Review , 1958, 48:3, pp. 261-297; ‘Corporate income taxes and the cost of capital: A correction’, American Eco- nomic Review , 53:3, 1963 pp. 443-53. 3 Ferran , E, Principles of Corporate Finance Law, pp. 54-56. 4 Yates, G. and Hinchcliffe , M. A Practical Guide to Private Equity Transactions