Structured equity: A practical guide for investors

As private markets continue to mature, structured equity has moved firmly into the mainstream. Whether used in growth capital deals, buyouts, or real estate transactions, it offers investors a compelling middle ground between debt and ordinary equity, but it comes with its own set of considerations. In this article, we explore some of the key characteristics of typical structured equity instruments.

What Is Structured Equity?

Structured equity sits between senior debt and common equity in a company's capital stack. Rather than a single instrument, it is an umbrella term for a range of securities designed to give investors preferential rights, downside protection, or both.

Common instruments include:

• Preferred shares: equity with priority over ordinary shares on dividends, distributions, and/or liquidation proceeds. Can be participating (participates in dividends in addition to fixed preferred return) or non-participating (only fixed return); and can be cumulative (unpaid dividends accrue) or non-cumulative.
• Convertible instruments or warrants: debt or preferred equity that converts into ordinary equity on a trigger event (e.g., a funding round or exit), often at a discount or with a valuation cap. Warrants may be offered in conjunction with other instruments and can be exercisable for nominal value (as an extra incentive or "kicker" to an ordinary equity or debt investment).
• Redeemable shares: shares that must or may be bought back by the company at a set price or on agreed terms, providing an equity-style investment with a debt-like exit mechanism (requires close coordination from a tax perspective to ensure the instrument receives the intended debt or equity treatment).
• Instruments with bespoke rights: equity instruments layered with negotiated governance rights, covenants, information rights, anti-dilution protections, and/or exit mechanics (put/call options, drag-along/tag-along rights, IPO ratchets). These rights can be contained in a typical agreement resembling a shareholders' agreement, or take the form of a more debt-like document with covenants or form a blend of the two.

These instruments can be combined, complemented and tailored as needed to meet the specific commercial objectives of both investors, founders and other stakeholders.

How Does Structured Equity Differ from Ordinary Equity and Debt?

Understanding where structured equity sits relative to conventional instruments is essential:

Structured equity investors do not lend money: they invest capital in exchange for a package of rights that are contractually superior to those of ordinary shareholders.

Why Use Structured Equity?

For investors:

• Downside protection through liquidation preferences, redemption rights and/or bespoke rights that trigger on underperformance
• Upside participation via equity participation, conversion or ratchet mechanisms
• Governance rights without necessarily holding a majority stake
• Portfolio diversification between fixed-income and full equity exposure

For companies and sponsors:

• Access to capital without the fixed repayment obligations of debt or broad-based security arrangements
• Preserves ordinary equity for founders and management
• Can be structured to avoid triggering debt covenants
• Attractive to a broader investor base, including those with return floor requirements

Typical Challenges: Key Jurisdictions

Structured equity is well-established in markets such as the United States and, increasingly, across global private markets. However, implementation varies significantly by jurisdiction. Below are some of the most common challenges practitioners encounter:

England & Wales

England is generally a supportive jurisdiction for structured equity. English company law allows broad freedom in designing share classes and attaching rights to them. The main challenges tend to be practical rather than structural:

• Accounting treatment (IFRS vs. UK GAAP) can determine whether instruments are classified as equity or financial liabilities; with material consequences for balance sheets and tax.
• Where instruments carry mandatory redemption or fixed return features, they may be reclassified as debt under accounting standards, limiting their commercial appeal.
• Stamp duty and tax structuring must be considered carefully, particularly on conversion events.

Luxembourg

Luxembourg is a popular holding jurisdiction for pan-European private equity structures and is generally flexible when it comes to structuring equity instruments. Common issues include:

• The use of Preferred Equity Certificates (PECs) and Convertible Preferred Equity Certificates (CPECs) — quasi-equity instruments used widely in fund structures — has been subject to evolving tax treatment both in Luxembourg and in the home jurisdictions of investors.
• Interest deductibility on shareholder loans and hybrid instruments is an ongoing area of scrutiny under EU anti-avoidance rules.
• Substance requirements and treaty access can affect the efficiency of Luxembourg holding structures.

Other Key Considerations Across Jurisdictions

• Contractual vs. constitutional rights: Governance arrangements may need to be contained purely in contractual agreements as opposed to the constitutional documents of the target company, and local company laws will need to be checked to verify whether there are any rights that can not be overridden by contract.
• Enforceability of exit rights: Put and call options may be generally enforceable in common law jurisdictions but can face challenges in civil law systems or where local courts treat them as disguised loan arrangements.
• Minority protections: The strength of minority shareholder protections varies significantly and may affect the value of preferred rights in a contentious scenario.
• Regulatory approvals: Changes in ownership or control triggered by conversion or redemption can attract regulatory scrutiny, particularly in regulated sectors, and may need to be addressed (and explained) at the onset of investments to regulators.

Conclusion

Structured equity is a powerful and versatile tool — but one that requires careful legal and commercial structuring. The right instrument depends on the jurisdiction, the asset, the investor's return requirements, and the company's existing capital structure. Getting it right from the outset makes the difference between a clean, enforceable investment and one that creates friction at exit.

If you have any questions about structured equity or would like to discuss how these instruments might work for your transaction, please do not hesitate to reach out to our team. White & Case has extensive experience advising on complex capital structures across global markets, and in particular has an experienced team based in the Middle East across our Dubai and Riyadh offices.

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_{This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.}

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