Why is the cost of capital higher for alternatives?

The cost of capital is often higher for alternatives due to the difficulty in securing traditional bank debt. Traditional financing options, such as banks, typically offer lower interest rates because they are backed by regulatory safeguards and have established risk assessments for standard financing practices. When alternatives are pursued, such as private equity or venture capital, lenders often perceive a greater risk associated with these investments.

This perceived risk can derive from various factors, such as the project's stage, market volatility, or the lack of a proven track record. Consequently, lenders and investors demand higher returns to compensate for that increased risk, resulting in a higher overall cost of capital for these alternative financing options.

While competition, demand for financing, and operational risks can influence capital costs, they are not as directly tied to the challenges in securing traditional bank debt. Thus, the difficulty in obtaining conventional financing stands out as the primary reason for why alternatives may have a higher cost of capital.