How is preferred return in typical JV different from “pref equity”?
Title says it all. I’m assuming that pref equity gets paid their stated return in full before the GP can collect some dollars, whereas in pref in a waterfall, the GP is still collecting their pro rata dollars before they hit the hurdles to then unlock promote?
Correct. Pref equity gets paid their pref and equity back before the GP/common equity gets a dime. In a JV, pref and equity are paid out pari pasu to the GP/LP (with some exceptions- deferred fees or notional capital “at risk”)
Gotcha, thank you. Is there really a diff between preffered equity and mezz assuming one or the other is absent ?
From a modelling standpoint, not really.
I have a redacted model about the capital stack, the mezz will always get paid off before the pref. Let me know if you have questions about this.
If one or the other is absent, not really. If both are absent the mezz gets paid first.
Mezz can foreclose via a UCC lien and wipe out the common equity.
Pref can only assume control via the operating agreement. If Pref sells after assuming control and proceeds are available after repayment of the pref, common still gets them.
There's other differences, but this is all that matters.
So mezz is debt (can foreclose) and pref is the true quasi debt - has debt-like provisions but can’t foreclose.
In addition to what others have said, pref often has a capped upside (like mezz), whereas JV equity continues to participate through the entirety of the waterfall
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