Saratoga Capital Investment Perspective
Why the way capital reaches a business matters as much as the amount invested.
Equity capital plays a fundamental role in the development of businesses. It provides companies with financial resources to establish operations, expand their activities, invest in new products and technologies, enter new markets, and strengthen their balance sheets. Unlike debt financing, equity does not generally impose a fixed repayment obligation, allowing companies to deploy capital over longer investment horizons and absorb the uncertainties associated with business development.
For investment funds, the ability to provide equity capital is an important part of their contribution to the wider economy. Funds can identify businesses with growth potential, assess their financing requirements, structure investments, and provide capital at different stages of a company’s development.
However, the relationship between investment and corporate growth is more complex than simply subscribing for shares. The legal structure through which capital is invested can vary considerably, depending on the company’s circumstances, its ownership structure, its stage of development, and the commercial objectives of the investment.
This distinction has become particularly relevant in the context of Portugal’s proposed changes to the Golden Visa fund investment route. The proposed amendment to the 2027 State Budget would increase the proportion of qualifying fund investments allocated to Portuguese-headquartered companies from 60% to 80%, while requiring that the relevant investment value be realized through increases in those companies’ share capital.
Although the proposal is intended to strengthen the contribution of investment funds to Portuguese businesses, it also raises a wider question: how should regulation distinguish between different forms of investment, and what constitutes a meaningful contribution to the capitalization and development of a company?
1. Equity capital as a foundation for business growth
Equity investment provides companies with capital in exchange for an ownership interest. The company receives funding, while the investor participates in its future economic performance and assumes the risks associated with the business.
For an early-stage company, equity may provide the initial financial resources required to establish operations, develop a product, recruit personnel, and reach commercial viability. For an established business, it may support expansion, acquisitions, new facilities, or entry into additional markets.
Equity is particularly important where a business has limited access to conventional bank financing, lacks a sufficiently established cash flow, or is pursuing a growth strategy that requires a longer investment horizon.
Private equity and venture capital funds play an important role in this process. They provide more than capital alone. Depending on the investment, they may also contribute strategic guidance, governance oversight, financial discipline, access to networks, and assistance with operational development.
The economic contribution of equity investment therefore extends beyond the amount recorded as share capital. It includes the resources and support that enable a company to develop and create sustainable value.
2. Primary equity investment and the capitalization of companies
One of the most direct ways to provide equity funding is through a subscription for newly issued shares or ownership interests.
A company may decide to increase its share capital to finance a particular project, strengthen its financial position, or support a wider business plan. An investor subscribes for the new shares, contributes the agreed amount, and receives an ownership interest in return.
This is commonly referred to as primary equity investment because the capital is contributed directly to the company rather than paid to an existing shareholder.
From a corporate financing perspective, this is an important mechanism. The company receives new resources, while its equity base is strengthened. The additional capital may also improve its ability to obtain other forms of financing, support future investment, or withstand periods of financial uncertainty.
However, the amount contributed by an investor does not necessarily correspond to the nominal increase in registered share capital.
Shares may be issued at a premium, with part of the subscription amount credited to share premium rather than nominal share capital. Economically, the company receives the full subscription proceeds as equity funding. The accounting and legal treatment, however, distinguishes between the nominal share capital and the additional premium.
A regulatory framework that focuses exclusively on the nominal amount of a capital increase could therefore fail to recognize the full value of the new equity contributed to the company.
For this reason, the treatment of share premium is not a minor technical issue. It is central to ensuring that a regulatory investment test reflects the actual capitalization of businesses.
3. Existing shares and the role of secondary investment
Not every equity investment involves the issue of new shares.
An investor may acquire an existing shareholding from a founder, an early investor, or another shareholder. This is a secondary transaction. The investor acquires an ownership interest, but the purchase price is paid to the selling shareholder rather than to the company.
The distinction is important. A secondary acquisition does not, in itself, provide new capital to the company.
Nevertheless, secondary transactions perform legitimate and often valuable functions within private markets. They can facilitate ownership succession, provide liquidity to early investors, enable founders to reduce their holdings, support changes in corporate control, and allow new strategic investors to participate in a business.
Secondary investment can also be part of a broader transaction involving new capital. An investor may acquire existing shares while simultaneously subscribing for newly issued shares, depending on the company’s financing requirements and the agreed investment structure.
The economic purpose of each component should be understood separately.
A regulatory framework may reasonably distinguish between capital contributed to a company and consideration paid to an existing shareholder. However, that distinction should not be confused with a judgment that secondary transactions have no economic value or place in the wider investment ecosystem.
4. The importance of investment structures
Companies do not all have the same financing requirements. Their capital structures evolve as they develop, and the appropriate form of investment depends on their commercial circumstances.
A newly established business may require equity to fund its initial operations. A growing company may need a combination of equity and shareholder financing. An established business may have sufficient assets and cash flow to support debt financing, while seeking equity for a new expansion project.
The investment structure should therefore be determined by the company’s needs, its financial position, the risks involved, and the expected return.
Even where an investment is ultimately structured as equity, the legal form may vary. Capital increases may involve different subscription prices, share premiums, classes of shares, shareholder rights, and corporate governance arrangements.
These features are not merely administrative. They determine the relationship between the company and its investors, the allocation of economic rights, and the manner in which capital is deployed.
A regulatory requirement that recognizes only one particular structure risks reducing the flexibility available to investment managers and companies when designing commercially appropriate transactions.
5. Investment funds and the allocation of capital
Investment funds operate by pooling capital from investors and allocating it across a portfolio of investments in accordance with the fund’s investment strategy, governing documents, and applicable regulatory requirements.
The manager must consider the risk and return characteristics of each investment, the diversification of the portfolio, the expected investment horizon, the liquidity profile, and the interests of the fund’s investors.
These considerations remain important whether the fund invests through newly issued shares, existing equity interests, shareholder loans, convertible instruments, or other financing arrangements.
The proposed Portuguese reform introduces an additional dimension to this decision-making process. If adopted in its current form, the requirement that at least 80% of the value of fund investments be realized through increases in the share capital of Portuguese-headquartered commercial companies would place greater emphasis on primary equity investment.
That may encourage funds to direct more capital toward companies seeking new equity financing. Such an objective can be positive, particularly for businesses that require long-term capital to support development and expansion.
However, the effectiveness of the framework will depend on how the requirement is defined and applied.
The investment universe must contain sufficient suitable opportunities. The valuations of prospective investments must remain commercially defensible. Fund managers must retain the ability to assess opportunities according to their investment merits, rather than being compelled to allocate capital to transactions that satisfy a formal requirement but do not adequately meet the fund’s investment criteria.
The objective should be to encourage productive investment, while preserving the integrity of the investment decision-making process.
6. Regulation should recognize economic substance
There is a legitimate policy interest in ensuring that investment migration programs generate tangible economic benefits for the countries in which capital is deployed.
In Portugal’s case, encouraging investment in domestic businesses and strengthening their capital base are understandable objectives.
The challenge is to design eligibility rules that achieve those objectives without unnecessarily restricting the commercial tools available to companies and investment funds.
An increase in registered share capital is one way of providing new equity. But the legal form of a transaction does not always provide a complete picture of its economic substance.
For example, an investment made through a capital increase with a substantial share premium may provide the company with significantly more funding than the nominal increase in share capital suggests. Conversely, a formal increase in share capital through the capitalization of existing reserves may not bring any new money into the business.
These examples illustrate why legislation should distinguish between a genuine contribution of new capital and a transaction that merely changes the classification of existing equity.
The same principle applies to the treatment of follow-on investments, holding company structures, and investments made through subsidiaries. Businesses frequently operate through groups of companies, and investment funds may structure transactions at different levels of those groups for legitimate commercial, operational, and risk-management reasons.
Clear rules are necessary, but they should be sufficiently comprehensive to accommodate ordinary corporate and investment structures.
7. The need for regulatory certainty
Investment decisions are made over time. Funds raise capital, identify opportunities, negotiate transactions, and develop portfolios based on investment strategies that may extend over several years.
Changes to investment eligibility requirements can therefore have consequences beyond the immediate question of whether a new subscription qualifies for a particular residency route.
They may affect existing funds, their ability to attract further capital, their follow-on investment strategies, and the financing plans of companies already within their portfolios.
For that reason, any reform should address transitional arrangements carefully. Investors, fund managers, and portfolio companies need to understand how the new rules will apply to existing commitments and investments, and whether changes to a fund’s investment strategy will be required.
The current framework, as described by AIMA – Residence Permit for Investment (ARI), Article 90-A, currently includes the €500,000 non-real-estate fund route, a minimum five-year maturity at the time of investment, and the requirement that at least 60% of the fund’s investments be made in Portuguese-headquartered commercial companies.
The proposed amendment would change the investment test materially. As reported by IMI Daily – Portugal’s Governing Parties Propose Tighter Golden Visa Fund Rules on November 9, 2026, the proposal is still subject to the parliamentary process, with committee votes scheduled for November 18–23 and the final State Budget vote scheduled for November 24.
The final wording, its implementation, and the treatment of existing investors and funds therefore remain subject to the legislative process. It would be premature to treat the proposed changes as enacted law.
Regulatory certainty is not simply a matter of administrative convenience. It is an important component of the investment environment. Capital is more likely to be committed over the long term when investors and businesses can understand the rules governing their decisions.
Conclusion: Encouraging capital, not prescribing transactions
Equity investment is an essential driver of corporate growth. It allows businesses to obtain long-term funding, strengthen their financial position, and pursue opportunities that may not be achievable through debt financing alone.
Investment funds can make an important contribution by directing capital toward businesses with growth potential and supporting them through different stages of development.
Portugal’s proposed reform presents an opportunity to strengthen the connection between investment migration and productive economic activity. However, the framework should be designed with a clear understanding of how companies are financed and how investment funds operate.
Primary equity investment should be encouraged where it is commercially appropriate. But the regulatory framework should also recognize the role of share premium, follow-on capital, appropriate corporate structures, and the broader financing tools that businesses require.
Ultimately, the objective should not be to encourage investment in a particular legal form for its own sake. It should be to attract sustainable capital, support viable businesses, and create an environment in which investment decisions can be made on sound commercial principles.
The success of an investment framework should be measured by the productive use of capital and the businesses it helps build—not simply by the legal mechanism through which the investment is made.
For a more detailed examination of the legal and transactional distinctions between primary equity, secondary acquisitions, share premium, and debt conversion, see What Does It Actually Mean to Invest in a Company’s Share Capital?.