Leverage flatters returns in stable conditions and removes optionality in every other condition. Why we underwrite real assets conservatively.
Debt applied to a stable income stream improves equity returns arithmetically. That is not a thesis, and it is available to every buyer, which is precisely why it is competed away in price.
What leverage also does is convert a long-term holding into a series of refinancing events. Each one is a date on which someone other than the owner decides whether the asset continues to be held.
We underwrite real assets to a level of debt that survives a covenant test at depressed income, not at underwritten income. That constrains the return we can present at acquisition and materially increases the probability that we still own the asset in a decade.
The purpose of conservative structuring is not caution for its own sake. It is retaining the ability to act in the conditions where acting is most valuable.