Preferred Equity differs from Common Equity in that certain investors (i.e. a “class of shares”) are given preference relative to the Common Equity in the distribution of cash flows.
Typically in a Preferred Equity investment, all cash flow or profits are paid back to the preferred investors (after all debt has been repaid) until they receive the agreed upon “preferred return,” for example, 12%.
Remaining distributions of cash flow are returned to Common Equity holders.
Investors seeking a higher yielding, but steady return, may invest in Preferred Equity. They forgo a larger potential overall return for consistent cash flow and less relative risk.
Importantly, both Preferred Equity and Common Equity represent ownership interests in an entity but are not secured nor do they have direct recourse to the asset, as is the case of Secured Debt.
Additional Resource: What’s in a Name: Mezzanine Debt Versus Preferred Equity