Blog 2: Understanding Preferred Returns and Equity Splits

When evaluating private investments, you’ll often hear terms like preferred return and equity split. Understanding these will help you know how and when you may get paid.

Preferred Return
The preferred return is the minimum annual return that investors are entitled to before sponsors receive profits.
Example: An 8% preferred return means the first 8% of profits go to investors.
Equity Split
After the preferred return is paid, profits are split between investors and sponsors according to an agreed percentage.
Example: 70/30 split means investors receive 70% of profits, sponsors receive 30%.

Why It Matters
Preferred returns and equity splits align incentives. Investors get first priority on returns, while sponsors are rewarded once they deliver results.

Takeaway
Always read offering documents carefully. Understanding preferred returns and equity splits ensures you know how your money will work for you.