Almost 12 years ago, very few people had a real understanding of what preferred equity was in the business world. Banks had little interest in them, and only knowledgeable investors knew their way around it. To say that it was a niche of interest on both sides would be an understatement in those years back then.
Fast forwarding to the year of 2018, preferred equities has raised its relevancy. As a multi-million dollar industry, it is no longer the misunderstood player of the market. Today, there are many big names dipping their toes in this niche to get a piece of the pie. After all, a financial instrument that generates $500 million in revenue a year is worth the attention.
Preferred equity assets work in a similar fashion to the mezzanine debt finance. For this financial instrument, it is used to fill the gaps of funding on any project, or to increase the leverage of a smart business opportunity. There is one main difference between the structures of mezzanine finance and preferred equity. With the mezzanine structure it is often offered as a preferred loan. Whilst with preferred equity, it does not hold any security for the asset per se.
Preferred equity is often used to gather unsecured fixed capital rates for real estate projects in development. This business scheme works on the grounds of being a flexible option for developers. Security is not required to the landowners, or the institution representing them. It also doesn’t require filing a registered mortgage over the land.
By using preferred equities, investors can release equity from their existing project. This allows them to fill the gaps in their capital requirements that are not recognised by their debt lenders. It can be used to increase financial potential of any project beyond what is offered by traditional means. This can be done without needing to seek multiple loans to cover all the grounds. It’s a risky venture, and should only be approached with trusted partners.
When it comes to real estate, preferred equity assets work differently to other forms.
As far as positive features go, these are the ones that stand out:
If we are to discuss the benefits, these are the ones that stand out:
Not a lot of investment options out there have this type of leverage. The main requirement to participate in the market of preferred equity assets is to have money. In Australia, lots of players work as the middleman in these transactions. This is because many developers and managers understand the benefits of getting the project done on time. It also saves the developer from needing to deal with established institutions.
The market for preferred equity is not limited to Australia. A lot of countries with expanding economies are also using this business scheme to get quick finance. If you are alarmed at the number of people getting into this niche, don’t worry. It’s a healthy sign of the market’s preferences and the reason why preferred equities are proving to be so successful.