Prioritize Returns: Structure Investments for Maximum Payouts

In investment deals involving preferred equity, achieving an impressive internal rate of return (IRR), such as 18%, typically necessitates a capital event, like asset sale, rather than relying on cash flow alone. Preferred equity holders initially receive 100% of incoming cash flows to recover their principal and accrued returns. Upon a capital event, the first proceeds prioritize principal repayment, while subsequent funds contribute to reaching the desired IRR. Implementing a minimum multiple structure ensures that the returns supplied to preferred equity holders meet or exceed this benchmark or the set IRR, often assessed after a few years.