Preferred equity is typically offered to institutional investors, such as private equity firms, hedge funds, and venture capital funds, as well as to high net worth individuals.
These investors are often looking for a higher rate of return than what they can get from fixed-income securities, but with less risk than common equity investments. In addition, some companies may offer preferred equity to their existing shareholders or employees as a way to raise capital while avoiding dilution of existing common equity shares.
Preferred equity can be an attractive investment option for investors because it provides some of the benefits of debt and equity investments. It typically offers a fixed dividend payment (preferred return) like debt, but with the potential for higher returns if the company performs well, similar to equity. Additionally, preferred equity often has certain rights and protections not available to common equity holders, such as priority in receiving dividend payments and liquidation preference. These features can make preferred equity a compelling investment option for certain investors looking to balance risk and return.
The return due may be compounding or non-compounding. There can be hurdles as well and those may be simple interest or IRR-driven. You may also have accrual or non-accrual of unpaid returns. If you are getting involved in these kinds of joint venture deals, it is wise to study up on all the various terms. You may be agreeing to what you think is a great return, but it may not be as good as you think if you have misinterpreted the language of the deal. This puts you at a disadvantage in negotiations.
