What is Preferred Equity?
Preferred equity is an investment structure that gives investors a priority claim on returns — above common equity holders — in exchange for a defined return or priority distribution. It sits between debt and common equity in the capital stack.
Preferred equity investors receive their return before common equity holders upon an exit or distribution. In fund structures, "preferred return" refers to the LP hurdle rate — the preferred return on committed capital that must be paid before the GP earns carry.
In direct investments and real estate transactions, preferred equity is a distinct instrument: an investment with seniority over common equity but subordinate to debt, often with a fixed preferred return and priority in exit proceeds.
Also known as: pref equity, preferred stock