If you could only keep one pref protection, which one actually pays you when the plan slips

Question

Been comparing four pref structures for a slot in a fund I'm slowly building, and every one of them has a different idea of what protects the investor. What I keep noticing is that the protections are traded against each other. Nobody gets all four at a price that clears.

The case for a date-certain forced sale right: it's the only remedy that converts to cash without a cooperative sponsor, and time is what kills subordinate positions. The case against is that in a soft bid you're forcing a sale into the exact market that caused the problem, and the senior lender's consent regime can stall you for a year anyway.

The case for a minimum multiple: it's the cleanest thing to enforce because it's arithmetic, and it means a fast payoff doesn't cheat you out of return. The case against is that a multiple is only worth something if there are proceeds, and it doesn't get you a dollar earlier.

The case for a 100% cash sweep above debt service: you get paid in real money as it exists rather than at some future closing. Against, it can starve the property of the cap ex that creates the value you're relying on, and sponsors fight hardest on this one.

The case for removal and control rights: you can fix the operating problem instead of liquidating it. Against, per the thread on this room from last week, they're often unusable without senior lender sign-off, and running someone else's asset is a business you may not want to be in.

Curious where the room lands. I genuinely don't know my own answer yet.

devon_pierce · Answer

I'd take the sweep, and I'd take it knowing it's the one that damages the asset.

My reasoning is that the other three are all promises about a future event where somebody else, senior lender or buyer or court, gets a vote. The sweep is the only one that happens automatically in the ordinary course. Money hits the account, the waterfall sends it to me, nobody has to agree to anything on the day.

The cap ex starvation objection is real and I'd handle it inside the sweep rather than by giving up the sweep. Carve out a defined cap ex line, funded first, capped at a dollar number in a budget I approve annually. Everything above that sweeps. That way the sponsor can keep the roof on and can't decide that a lobby renovation is more urgent than my distribution.

Where I'd flip is on a ground-up or a heavy repositioning with no cash flow for two years. A sweep on zero is zero, and there the multiple plus a redemption date is doing all the work. anchor, are these four structures all on stabilized assets, or is that mix part of why they're pricing the protections differently?

If you could only keep one pref protection, which one actually pays you when the plan slips

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