Capital intensity has become a negotiation point, not just an accounting fact. In sectors like logistics, healthcare, industrials, and infrastructure, buyers are often less interested in owning hard assets outright and more interested in controlling how those assets are financed and used. That is where capital lease structures show up in M&A and private equity deals as a quiet but powerful design choice.

The concept is simple. A capital lease lets the lessee behave like an owner, carry the asset and liability on the balance sheet, and harvest the economic benefits, while the legal title stays with a landlord or lessor. In practice, that can free up equity for the deal, sharpen IRR, and create a cleaner story for exit. It can also load a portfolio company with hidden leverage, restrictive covenants, and lease tails that outlive the sponsor’s hold period.

For acquirers and PE teams, the real question is not “lease versus own” in the abstract. It is when ownership without title actually improves deal economics and risk, and when it quietly erodes them.

Below, we will unpack how capital leases work inside transactions, how sponsors use them, where the traps are, and when they genuinely beat straight ownership.

Capital Lease Basics in M&A: Economic Ownership Without Legal Title

From an investor’s perspective, the key feature of a capital lease is economic ownership. Accounting standards define a finance or capital lease as one that transfers substantially all the risks and rewards associated with an asset to the lessee, even though legal title remains with the lessor.

In practical deal work, that means a few things:

• The lessee recognizes a right-of-use asset and a lease liability.
• Lease payments are split into interest and principal in the income statement and cash flow statement.
• Analysts treat the lease liability as debt when they assess leverage, covenants, and enterprise value.

IFRS 16 and similar standards under US GAAP pushed this logic further. Most leases now sit on the lessee’s balance sheet, which means capital lease discussions are no longer just an accounting footnote. They shape leverage ratios, interest coverage, and even how banks underwrite new facilities.

In M&A models, capital leases sit in an awkward but important spot. They are not classic senior term loans, yet they behave like fixed commitments that rank ahead of equity. When buyers estimate enterprise value, they typically add lease liabilities to net debt to measure total capital employed. When they negotiate purchase price adjustments, they often push to treat certain embedded leases as debt-like, not working capital items.

Due diligence teams therefore spend more time than many founders expect dissecting lease schedules. They map out remaining terms, escalation clauses, renewal options, and residual value guarantees. They also test whether lease classification is consistent with the economics. A “service contract” that, in substance, is a multi-year financing of equipment can quickly be recast as a capital lease, with very different implications for leverage and covenants.

Sector context matters here. In asset-heavy businesses like industrial services, transport, retail, and telecom, capital leases can represent a significant share of effective investment. In Japan, for example, one recent leasing survey reported that leasing accounted for around 4.34% of total capital investment in 2024. In Europe and North America, leasing activity is similarly embedded in how companies fund equipment fleets, IT infrastructure, and specialist machinery

For deal teams, that means you cannot talk about “asset-light” or “asset-heavy” without reading the lease footnotes. Many platforms that market themselves as lean are simply leasing rather than owning. The risk is not that leasing is bad. The risk is that you misread the leverage profile and overestimate financial flexibility.

Using Capital Lease Structures in Private Equity Deals: Sale-Leasebacks, Equipment, and Real Estate

Private equity sponsors use capital lease structures as a way to reshape the capital stack around a portfolio company without changing the operating footprint. The classic play is a sale-leaseback. Real estate, aircraft, railcars, logistics hubs, or specialized plants are sold to a long-term investor, and the company signs a capital lease or long-term lease to keep using the asset.

For the sponsor, this can feel like creating equity out of nowhere. By selling a property at a real estate multiple and leasing it back, you often crystallize value above the operating-company multiple. Several real estate and advisory firms highlight how sale-leasebacks allow PE-backed companies to convert illiquid owned property into cash while staying in place as long-term tenants, often on triple-net terms.

That cash can fund:

• A higher initial acquisition price, effectively using real estate value to bridge a valuation gap.
• Capex to support growth, such as new lines, automation, or systems.
• Deleveraging of more restrictive bank debt, which changes covenant headroom and refinancing risk.

Equipment-heavy deals follow a similar logic. Leasing fleets, rolling stock, or specialized machinery can align financing tenor with asset life, free up revolver capacity, and reduce the need for large upfront capex. For industrial roll-ups, moving a new platform onto a standardized capital lease program for equipment can also create uniformity and purchasing leverage across add-ons.

Sponsors have become more sophisticated in using these tools across the deal cycle. Some will structure a partial sale-leaseback at entry to avoid over-levering the operating company with term debt. Others will deliberately postpone a sale-leaseback to mid-hold, using it as a refinancing and distribution lever once the underlying business has improved. In both cases, the capital lease structure is framed as a strategic financing choice, not an accounting tweak.

The scale of the leasing market makes this more than a niche tactic. One recent estimate put the global enterprise asset leasing market at around 1.5 trillion dollars in 2025, with projections above 5 trillion dollars by 2035.(Precedence Research) That pool of capital is increasingly accessible to PE sponsors that want to monetize embedded assets without shrinking operations.

There is also an alignment story that often gets overlooked. Many long-term lessors, particularly in real estate, infrastructure, and equipment, are happy to accept lower nominal returns than buyout funds, in exchange for stable, inflation-linked rent streams. That spread between the asset yield and the operating-company multiple is exactly what private equity teams are trying to harvest when they lean into capital leases.

The catch is that every gain in flexibility at the holdco level usually comes with a tighter straightjacket at the asset level. That is where risk management earns its keep.

Capital Lease Risk in Transactions: Hidden Leverage, Covenants, and EBITDA Illusions

Capital leases clean up the balance sheet story only if everyone around the table is honest about what they represent. At underwriting, the main risks cluster around three areas: hidden leverage, restrictive covenants, and distorted performance metrics.

First, the leverage question. A company might show bank debt of 3.0x EBITDA and proudly present itself as conservatively capitalized. Once you add long-term capital lease obligations, true leverage could sit closer to 4.5x or 5.0x. Under IFRS 16 and comparable local standards, bringing leases onto the balance sheet has already exposed this for many issuers, and regulators, creditors, and rating agencies increasingly view lease liabilities as debt-like.

If deal teams ignore that, they risk stacking new term loans or unitranche facilities on top of lease obligations that already consume a large share of the company’s free cash flow. A rising-rate environment makes this even more sensitive. Financing that looked comfortable when base rates were near zero can start to pinch when lease discount rates and reference rates move higher.

Second, covenants and control. Capital leases often come with maintenance obligations, usage restrictions, and financial covenants at the asset level. Real estate leases may restrict subletting or alterations. Equipment leases may require minimum maintenance, usage caps, or insurance thresholds. In some structures, breaching those terms can trigger cross-default into other financing, particularly in tightly structured PE deals.

This matters a lot for integration plays. Suppose a sponsor is rolling up regional logistics operators, each with its own capital lease arrangements for depots and trucks. If the integration thesis involves re-routing, asset disposals, or footprint consolidation, those lease terms can suddenly limit flexibility or trigger penalties.

Third, EBITDA inflation. Historically, one reason management teams liked operating leases was that they kept depreciation and interest out of the income statement and inflated EBITDA. With capital leases, the accounting treatment changes the optics. Lease expense is separated into interest and depreciation, which often increases EBITDA even though total cash outflow is unchanged. If valuation discussions anchor on EBITDA multiples without properly adjusting for lease capitalization, buyers can overpay.

Sophisticated PE and corporate development teams now run “pre-IFRS 16” and “post-IFRS 16” views when they evaluate targets. They normalize EBITDA, lease-adjust net debt, and test interest coverage including lease interest. Where the numbers are tight, they re-open the deal structure or push for price moves, rather than pretending the lease liability is something other than leverage.

There is also a behavioral risk. Once a company becomes comfortable with capital lease financing, there is a temptation to push more and more assets into that bucket. Fleet upgrades, new warehouses, high-end IT equipment, even some fit-out capex can get leased rather than funded through equity or traditional debt. Done thoughtfully, that is fine. Pushed too far, it creates a brittle capital structure that leaves very little room for operational surprises.

When a Capital Lease Beats Ownership: Structuring, Negotiation, and Exit

Despite the risks, there are situations where a capital lease is genuinely superior to outright ownership in an M&A or PE context. The trick is to be explicit about what problem you are solving.

A capital lease tends to make sense when:

• The asset is mission-critical for operations but not a source of competitive differentiation, such as generic warehouses, standard rolling stock, or commodity equipment.
• Dedicated real estate or equipment investors are willing to pay a higher implied multiple than operating-company buyers.
• The sponsor wants to free up liquidity without taking on additional unsecured debt, or wants to avoid breaching covenants in existing facilities.

Structuring choices matter. Term length should align with both asset life and expected hold period. A 25-year lease on a property you plan to exit in five years can still work, but only if you have a clear view of how future buyers will price that lease. Triple-net terms can be attractive for lessors, yet from the lessee’s point of view they effectively transfer many ownership burdens back to the tenant. If you accept those terms, you want rent and escalations that reflect the risk.

Negotiation often pivots around rent, renewal, and control. Rent must strike a balance between near-term free cash flow and long-term valuation optics. Renewals and options can either support the equity story or undercut it. A buyer who sees an inflexible lease tail that locks the company into uneconomic space may discount the multiple. Control provisions, such as assignment rights and permitted change-of-control clauses, should be consistent with an eventual sale of the operating company.

Exit planning is where many capital lease strategies either shine or crack. Ideally, the capital lease story becomes part of the equity pitch. You can show that you monetized non-core ownership positions, partnered with high-quality lessors, and locked in predictable, appropriately priced occupancy or equipment costs. You can demonstrate that buyers are inheriting a capital structure designed for resilience, not cosmetic window dressing.

If, instead, the lease portfolio looks like a patchwork of bespoke deals, opaque risks, and aggressive escalators, sophisticated buyers will either price that complexity or step away. The Asda and AT&T sale-leaseback headlines are reminders that the market is watching how sponsors use these tools to manage leverage and liquidity, not just how they report earnings.

For investment and corporate finance professionals, the right mindset is simple. Treat every capital lease as part of the deal’s capital architecture, not as a footnote. Underwrite it with the same rigor you apply to term loans. Ask whether it supports the thesis, preserves flexibility, and remains attractive to the next owner.

Capital lease structures sit at the intersection of finance, operations, and strategy. In M&A and private equity, they can unlock trapped value in hard assets, align funding with asset life, and sharpen equity returns when used with discipline. They can also hide leverage, restrict operational freedom, and cloud performance metrics if teams treat them as a technical accounting choice instead of a strategic one. The investors who handle capital leases well do not ask “lease or own” as a generic question. They start with the deal thesis, the asset’s real role in that thesis, and the preferences of the eventual buyer. Only then do they decide whether ownership without title actually strengthens the story they are trying to build.