What defines preferred equity in finance?

Preferred equity is defined by its characteristic of typically offering a fixed return, which sets it apart from common equity and other financial instruments. Investors in preferred equity generally receive dividends at a predetermined rate, much like bondholders receive interest payments. This fixed return is appealing to investors as it provides a certain level of income and can help with cash flow predictability for the company issuing the equity.

One distinguishing feature of preferred equity is that it usually has a higher claim on assets than common equity in the event of liquidation, making it less risky compared to common equity, which does not guarantee any returns and is subordinate in the capital structure. This fixed return aspect is what makes it attractive to those looking for income stability in their investment, similar to traditional debt instruments but without the same level of seniority.

While preferred equity does have certain characteristics that are debt-like, it is essentially an equity instrument because it represents ownership in a company, unlike traditional debt which requires repayment of principal and interest. Additionally, it ranks above common equity in the capital stack, which affords its holders preferential treatment over common shareholders when it comes to distributions and liquidation preferences.