Preferred Equity 101
📈 Preferred equity (PE) is the layer of a capital stack that sits in between common equity and the senior debt (or sometimes Mezz).
Since we always read the capital stack from the bottom up, we can see that senior debt is always paid first, then preferred equity, and then finally common equity.
Often PE investors are providing a large chunk of equity, and therefore, want to get paid first (preferred position) before the common equity.
By getting paid first, the PE provider is in a less risky position compared to the common equity investors.
✔️ Important: PE is interesting because it has characteristics of both debt and equity. Meaning, preferred equity often gets paid a fixed rate of return (like debt) but can also still earn tax and depreciation benefits (like equity).
