Preferred Equity in Australia

A Brief Guide About Preferred Equity and How it Works in Australia

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.

But What Exactly is Preferred Equity?

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.

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.

Preferred Equity Features and Benefits

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:

  • Preference in dividends: The size of the investment made on preferred equities determines how much you get paid and how fast. People who invest substantial money get to collect profits more quickly.
  • Preference of Assets if the case of Liquidation: This particular feature is a way to cover the back of investors if a business venture goes belly up. It involves a lot of legalities as well as terms that are signed over by the parties. If a deal falls through, the investors get to collect their money back when the assets are liquidated.
  • Convertibility: Preferred equity assets can be sold, transferred and negotiated freely. It’s possible to convert the options of investors, in the event that they feel the need to pull out of the deal.
  • High Dividends Yields: If the business deal goes through, the financing partners get to collect a full set of dividends without needing to deal with bank commissions.

If we are to discuss the benefits, these are the ones that stand out:

  • Preferred equity is more cost-efficient and flexible than debt. It offers an alternative that bypasses long waiting times with obtaining bank funding. This allows developers to focus on the project and target the set goals.
  • In the long run, preferred equity is cheaper and more flexible than borrowing money. It also sets the value of a project in real time. This could potentially make property more affordable for more people. It’s also a great way to invest money and collect profits back quickly.
  • The market for preferred equity assets is very dynamic. The agencies dealing with these options rely on fast analysis and quick decision-making. This is to provide potential investors with the best advice possible. The demand for preferred equity options caters to a large number of small players, so it’s possible to get in the game even if you don’t have a lot of money.

Can I Qualify for Preferred Equity?

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.