Preferred Equity vs. Sub DebtSubscribe
Under what situation (s) typically, would a PE sponsor want to structure its investment in the company in the form of preferred and common (as opposed to subordinated debt and common) assuming there’s room for the company to take on the sub and no leverage covenant will be breached? Confused because in principle the pref and sub-debt sound the same (junior, unsecured, and targeting mid-teen returns). If the sponsor can invest in the form of sub-debt and get the coupon payments deductible for tax purposes, why won’t it? Its’ dividends as holders of pref won’t be tax-deductible, and so going with sub debt will help the portco lower its overall tax bill yet allow the sponsor to benefit.