How is direct private equity typically structured?

Direct private equity investments are often structured as convertible preferred stock because this form of equity provides investors with a combination of equity-like features and downside protection. Convertible preferred stock typically gives investors priority over common stockholders in terms of dividends and in the event of liquidation, which helps protect their investment. Additionally, the "convertible" aspect allows investors to convert their preferred shares into common stock at a later date, usually at a predetermined price or ratio. This is attractive in private equity because it allows investors to benefit from equity appreciation while managing their risk.

In contrast, ordinary common stock does not offer the same level of security or priority in payouts and is typically subject to greater risk. High-yield bonds, while offering fixed income and some investment opportunity, do not align with the growth expectations typical in private equity investments. Simple notes payable are more akin to traditional debt instruments and lack the equity component necessary for private equity structure, which inherently involves taking ownership stakes in companies.