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Updated over 4 years ago,
Questions about syndication deals with two equity class shares
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