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Structured Preferred Equity: Documentation, Protective Covenants, Tax Treatment, Use in Debt Restructuring

Note: CPE credit is not offered on this program

Recording of a 90-minute premium CLE video webinar with Q&A

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Conducted on Wednesday, September 22, 2021

Recorded event now available

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This CLE course will examine the structuring and documentation of preferred equity investments in private companies. The panel will discuss protective covenants and the distinctions between preferred equity and debt, terms issuers and investors should consider to ensure equity treatment, and preferred equity as both a new money financing instrument and debt restructuring tool.


Increasingly, fund sponsors are turning to third-party preferred equity as a financing tool. Preferred equity financings can be attractive to alternative credit providers because they are priced to provide higher returns than traditional debt investments. Still, counsel must be aware of the legal and structural differences between preferred equity and traditional debt investments.

A key feature of preferred equity financings is that there is typically no stated maturity date and no mandatory redemptions or put rights unless there is a change of control or IPO. The uncertain exit timing should be considered by prospective investors, especially fund investors with limited lives.

Investors may negotiate certain rights to effect an exit, such as the right to appoint directors or demand a sale of the issuer after the anticipated investment period has run. They will not have the same rights to enforce payment as holders of debt, the benefit of collateral or guarantees, or the ability to act as a creditor in a troubled situation. Prospective investors must be sensitive to how their interests may differ from the lenders and structure the covenant package accordingly.

Investors should consider whether the coupon on the preferred equity investment will generate phantom income. The tax status of the issuer, the specific terms of the preferred equity, and the nature of the investor and its owners will figure into structuring from a tax perspective.

Listen as our authoritative panel discusses the structuring nuances of preferred equity investments. The panel will also discuss the use of preferred equity in certain workout scenarios, including a debt for equity swap to right-size the balance sheet or to hand over control to the lender.



  1. Preferred equity: key features
    1. Straddling the line between debt and equity
    2. No maturity date: lack of control over exit
    3. Limited enforcement rights
    4. Subordinate to company debt and subsidiary equity
  2. Protective covenants
  3. Tax treatment: phantom income
  4. Preferred equity as a debt restructuring tool


The panel will review these and other important issues:

  • How does preferred equity differ from traditional debt, and when is it a desirable alternative?
  • What protective covenants are typically included in preferred equity documents?
  • Can the dividend and repayment terms be structured to avoid phantom income?
  • What are the potential uses of preferred equity in restructuring company debt?


Boyko, Stephen
Stephen A. Boyko

Proskauer Rose

Mr. Boyko's primary focus is in finance transactions, particularly those involving private sources of capital. He...  |  Read More

Hillman, David
David M. Hillman

Proskauer Rose

Mr. Hillman is co-head of the Private Credit Restructuring Group and a member of the Business Solutions,...  |  Read More

Peck, Steven
Steven M. Peck

Proskauer Rose

Mr. Peck is a partner in the Corporate Department and member of the firm’s Private Equity and Mergers &...  |  Read More

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