Definition
Preferred returns (typically 5-8% annually) go to investors before sponsor shares in profits. This protects downside and incentivizes sponsor performance.
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Preferred returns (often 6-8% annually) go to investors before sponsor shares in profits. Encourages investor participation and protects downside. If performance doesn't meet preferred return, shortfall may carry forward. Incentivizes sponsor to maximize returns. Combined with profits above preferred return creates alignment. Terms vary by deal. Priority payment order in waterfall structure. Common in syndications. Improves investment appeal. Protects conservative investors. Reduces sponsor returns in underperforming scenarios.
Pro Tip
Preferred returns improve downside protection. Verify payment priority in waterfall.
Example
Investment offered 7% preferred return paid quarterly to all investors.