Ok, so from my perspective, the use of preferred equity is often involved in joint ventures within the oil and gas or real estate deal industries. It can be used for all sorts of businesses though and really just represents a certain risk / reward profile for investors and operators. I thought it would be interested to give some history on how this type of equity came to be and what was the very first deal to use this finance structure.
Relevant Template
Preferred equity, also known as preference shares or preferred stock, has its origins in the early days of the stock market when investors sought a more secure form of investment than common equity (common stock).
Preferred equity is a type of security that has characteristics of both debt and equity. It typically pays a fixed dividend, which gives it a bond-like quality, but also gives the holder the right to participate in the growth of the company through potential capital appreciation.
The first preferred stock was issued in the United States in the mid-19th century by the Pennsylvania Railroad Company. These shares were designed to provide investors with a higher dividend payout than common stock and a priority claim on company assets in the event of bankruptcy.
Preferred equity became more popular in the early 20th century when large public utilities and transportation companies began issuing them to raise capital. By the 1920s, preferred stock had become a common investment vehicle for both individual and institutional investors.
Today, preferred equity is still used as a means of raising capital by many companies, particularly those in the financial sector such as banks and insurance companies. It remains a popular choice for investors seeking a higher yield than common stock without taking on the same level of risk.
Nuance with Ongoing Preferred Return Calculations
When building a financial model for this financing structure, I did a deep dive into the most common variations. What I allowed to happen is a simple on/off switch so you have the option to accrue unpaid pref. returns or start fresh each year as well as the option to separately compound any unpaid pref. return, thereby raising the dividend payment going to investors. It is a very popular template on the site here and has had great feedback and use.
Note, in the logic I have modeled for preferred equity, it assumes 100% of the initial investment + preferred return / dividend is all due before cash is split anywhere else. As the equity is repaid, it will effect the amount of the return that is due each period. I also added an equity kicker for the pref. pool as an option in it.
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