Questions about syndication deals with two equity class shares

[John Cho]

Ive seen a proliferation of deals in the last year with two equity shares consisting of preferred equity and the more typical common equity that is common to more typical syndication deals. The Class A preferred equity is often 1-2% higher in pref than the common equity with no participation on the upside (refinance/sale).  Class B common equity with lower pref than in deals past with more typical waterfall splits.  

Is there a reason why syndicators are going to this model? It seems like a crappy deal for the LP compared to a simpler structure and was wondering if there was something Im missing besides the GP needing to raise money at inflated prices to pencil their deals at an acceptable pro forma IRR.

Here are the cons as i see it

Class A Preferred equity

-taking on equity risk (loss of capital) in a non liqiuid asset locked for 3-7 years with no participation on the upside on refinance or sale. Pref is usually 9-10% but again this is equity behind all the loans in the capital stack. Ive also seen this being deceptively marketed as a being safe or conservative as if it is a 1st lien secured loan to the LLC.

Class B common equity   
-increased risk of capital loss by having another layer above you in the capital stack if the deal goes south and performs sub par. 

-decreased pref compared to deals with just a common equity structure 
   

[Mack Benson]

The theory is that cap rates could increase due to a recession which would lead to a decrease in prices. Because of the debt being put on the properties the sponsors may be forced to sell at a less than ideal time and there won't be as much of an upside. The investors investing for a higher pref are hedging their bets that the market may not be as strong at the end of the loan term which could lead to the deal sponsor having to sell rather than refinance. They are choosing to take a higher return during the life of the deal in exchange for taking none of the upside. Offering this can help the deal sponsor give a greater upside to the other share class to increase their IRR.

All of this complicates things and I'd rather keep it simple. As one of my mentors says, "A confused mind says NO."