What is Preferred Equity?

Preferred equity sits between debt and common equity in the capital structure. Holders receive a preferred return before common equity gets paid but, unlike debt, do not have a contractual right to mandatory interest payments or a defined maturity date.

Standard structure in NZ property and PE deals: - Preferred return — typically 7-12% per annum, accruing whether or not the project is paying. - Catch-up provision — preferred equity is paid before common equity until accumulated preferred return is satisfied. - Limited upside participation — preferred equity may share in the residual upside above a hurdle, or may be capped at the preferred return only. - No mandatory maturity — exit happens when the project is sold, refinanced, or recapitalised.

Why used: preferred equity is contractually softer than debt — no mandatory interest payments, no covenants, no maturity-date stress. This gives the project sponsor financial flexibility. The cost is that preferred equity is structurally riskier than debt and is priced accordingly.

Tax treatment: distributions on preferred equity are typically dividends with imputation credits attached, taxed at the holder's marginal rate. This contrasts with debt interest which is straightforward taxable income.

Wholesale investor encounter: preferred equity is most commonly available through closed-end PE / property funds that invest across the capital stack, or through bespoke direct-deal opportunities. Wholesale Investor NZ does not currently tag a specific preferred-equity-only filter.