This article appeared in The Bankruptcy Strategist, featuring the strategies and techniques devised by the country's top bankruptcy lawyers and reports on innovative procedural techniques, legislative developments and recent judicial rulings — plus what they mean for you and your clients.

Preferred equity instruments have become increasingly popular as a source of financing for private equity sponsors executing large leveraged acquisitions. Investors seeking the risk profile of debt but also the return potential of equity are attracted to the hybrid nature of preferred equity, which generally ranks senior to common equity interests (like debt) and may entitle the holder to common equity-like upside. By law, preferred equity is a varied and flexible instrument, but, in practice, it typically has a limited number of common features. One feature is that the preferred equity is entitled to a "liquidation preference" ahead of common stock. The liquidation preference is typically triggered upon a "liquidation, dissolution or winding up" whether "voluntary or involuntary" and most often equal to a fixed dollar amount per share plus accrued and unpaid dividends to the date of the liquidation, dissolution or winding up.