Senior, Mezzanine or Preferred Equity positions: how to choose your Risk/Return profile

Investing in real estate can turn out to be a valuable strategic choice, but it is crucial to carefully consider the wide range of available options: unlike other forms of investment, in fact, the real estate market is characterized by greater illiquidity, mitigated by YELDO's distintive approach, which means that financial decisions must be made with greater caution.

One of the keys to optimize your investment is to wisely evaluate your risk/return profile, i.e., the balance between the risks involved in a financial transaction and the potential benefits to be gained from it from an economic perspective. 

To make it simple, as it is well known, in general the greater the risk, the greater the potential gain; the two variables are directly proportional.

In detail, the choice between senior, mezzanine, or preferred equity positions can significantly influence the risk and return profile of a real estate investment. But what exactly does “position” mean in this financial context?

Let's explore these concepts in detail to understand how they affect investment strategies.

Differences between Senior, Mezzanine and Preferred Equity positions

In the real estate investment business, financial positions define the priority of repayment and the risk associated with an investment.

The three main categories of positions we consider are senior, mezzanine, and preferred equity. Each one has distinctive characteristics that affect their risk and return profile.

Senior Positions

Senior positions represent the highest level of priority in a financing arrangement: these investments are generally secured by specific assets or properties, implying that in the event of liquidation of the company or property, holders of senior positions are the first to be repaid. Against this security, senior positions usually offer lower rates of return than other higher-risk positions. However, they offer greater capital protection, making them a preferred choice for more cautious investors.

Mezzanine Positions

Mezzanine positions occupy a middle step in the capital hierarchy: although they do not have the same priority as senior positions, they still offer greater protection than pure equity. Investors in mezzanine positions take on more risk than senior lenders, but in return they earn higher returns. This type of financing is often used to bridge the gap between venture capital and traditional debt, offering greater flexibility and financing options. 

Preferred Equity

Preferred equity represents a form of investment that combines elements of venture capital and debt. Investors, in fact, receive preferential treatment over ordinary shareholders in terms of dividend distribution and capital repayment but, compared to senior positions, they do not have the same priority in the event of liquidation.

These products, therefore, offer a good balance between risk and return, with higher interest rates and returns and greater risk than senior positions. It is a viable alternative to traditional private equity, in case entrepreneurs do not want to have too much influence in the management of the company and especially do not want to preclude a future sale to a third party: they imply limited voting rights, i.e., they provide for voting only on sensitive issues but which do not normally concern the general management of the company.

Yeldo: financial innovation on the Italian market

Yeldo specializes in the real estate investment sector, with a brand new philosophy in the market, aiming to optimize opportunities for its investors.

We offer our investors several investment solutions, such as loans or bonds with senior positions, which represent a lower-risk investment opportunity with a high capital repayment priority. These deals are often secured by specific real estate assets, which gives them a high degree of security. This also provides high protection in case of financial difficulties of the issuer. Our mezzanine solutions are also particularly profitable for investors seeking a balance between risk and return. 

Our investors also have access to preferred equity positions: this investment option offers our investors a combination of equity-like features with security similar to that of bond positions. In fact, it is possible to achieve competitive returns while maintaining relatively high protection compared to purely equity investments.

Register and browse several Real Estate investment opportunities, protected by real assets.

Join now and discover our investment opportunities