current coupon rates on preferred equity

July 08, 2023

by a searcher from University of Illinois at Urbana-Champaign in Ann Arbor, MI, USA

I'm looking to informally benchmark current fair market value (FMV) for coupon rates for preferred equity from arms-length investors in search fund and independent sponsor deals. I'm aware of the 7-10% range that is customarily discussed. Logically, our current higher interest rate environment would push up coupons, since they are lower preference than debt.

To be clear, I'm not looking to support an argument for holding down the rate. I'm just seeking current experience in arm-lengths deals to infer something re: FMV. Thanks for your help!

Reply by an investor
from University of California, Berkeley in San Francisco Bay Area, CA, USA

I have not seen a deal below 10% in the past few months while 2 years ago it was typically 8% (with some people pushing for 6%). As an investor, I feel the coupon rate should be co-related to equity participation. If someone offers 20% participation, I would look for a coupon that is significantly above 10% and a low multiple. On the other hand, if equity participation is high, then 8% seems fine.

Reply by an investor
from Western Washington University in Key West, FL 33040, USA

I agree with Thomas. It's six of one, half a dozen of the other. Investors are looking at the total IRR, which is a combination of the preferred return, equity participation (i.e. equity step-up), and overall deal economics.

+3 more replies.

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