A sponsor I follow is raising a preferred equity tranche on a 90-unit deal and the minimum is $250,000. Then I read a piece that said retail investors get into pref for $50,000 or even less. Those two numbers can't both describe the same thing. Is the small version only on the crowdfunding sites, and does the size of the check change what I'd actually own or just how much of it I own?
Two different products. A direct pref position in one deal usually starts at $250k to $1m, because the sponsor has to amend and restate the LLC agreement to put your priority in it and doesn't want thirty signatures on that document. The $50k versions are almost always a fund or a platform that aggregates money and then takes the pref position itself, so you own an interest in their vehicle and the vehicle owns the priority. At $250k you may get the sponsor on the phone and a comment or two on the agreement. At $50k you get a quarterly PDF and whatever terms someone else negotiated.
The platforms I've looked at post $25k and $100k minimums on pref tranches, with an asset management fee somewhere around 1 to 1.5 percent a year and sometimes a slice of the upside. That comes off your 11 or 12, so the net you see is well below the headline rate. Worth doing the subtraction before you compare it to anything.
At $50k, paying an attorney to read the LLC agreement costs you more than a point of yield. That's the actual minimum.
Who pays the sponsor's lawyer on these, and does it come out of the deal or out of the money the pref investors put in? I've seen "organizational and offering costs" as a line item and never once seen a number next to it.