Preferred equity is a financing solution that allows private equity investors to achieve early liquidity with out selling their LP stakes. Understanding the following characteristics will give you a good sense of how these transactions are structured. Loan To Value (LTV) Net Asset Value (NAV): Let's say you are an LP in KKR North America XIII. Your capital statement may say that your portion of NAV is worth $100 million. Verx valued each Company in the fund and agrees with the GPs valuations. Verx has already approved a 50% LTV loan meaning you can immediately borrow up to $50 million. Fair Market Value (FMV): Now let's say you are an LP in a more challenged fund. Your capital statement says your portion of NAV is worth $100mm. Verx and our lenders will value each individual company and they may decide that the fair market value (FMV) is closer to $80mm. Maybe the GP is being too optimistic in its valuations. In that case, our lenders may want to stick to a 50% LTV profile so you may be approved to borrow up to $40mm. That is 50% on FMV but 40% on NAV. Paid In Kind Interest (PIK) Let's say you borrowed $100mm at a 10% rate. If the loan utilizes cash interest you would have to wire the lender $10mm every year. Alternatively, if the loan utilized PIK interest the $10mm would accrue to your loan balance and no cash would leave your pocket at the end of year one. At the end of year two, the 10% PIK rate will be applied to a $110mm loan balance. PIK interest is viewed as a flexible solution for private equity given cash proceeds from exits are chunky. The longer the balance is left outstanding the more expensive the solution will become. This is why these solutions are better suited for tail-end funds in which the expected duration is 3-5 years. Minimum ROI The main purpose of the minimum ROI is to protect lenders against short duration. Lets say you borrowed $100mm at a 10% PIK and a 1.3x minimum ROI. Contractually, lenders are guaranteed a 1.3x return or $130mm. For example, if one of the underlying companies had a home run exit in year 2 generating $150mm of proceeds you would be able to pay down the full $110mm outstanding balance. Nevertheless, you would be required to pay an additional $20mm to meet the minimum ROI. Cash flow share (also known as Warrants) You can think of this as giving up some equity in your LP stake. If a solution includes 5% cash flow share that means that even after the outstanding loan balance and minimum ROI is met, 5% of all future proceeds from the underlying collateral will go to the lender. Even if the available financing solutions include a 5-15% cash flow share it may still be a better alternative to selling your stake. For example, you may be able to sell your energy LP stakes at 50 cents on the dollar and lock-in an underwhelming outcome or secure a pref solution in which you give up 15% equity but you achieve immediate liquidity and retain upside potential. If you made it this far you already have a better understanding of structured liquidity solutions than most. Reach out to diego@verxcapital.com to learn more!

Verx's digital platform allows LPs to access liquidity solutions on an Opt-In basis. Pro and against fund-financing LP viewpoints are satisfied GPs benefit from more fund commitments Traditional lenders benefit from Verx aggregating LP demand by making what could be a cumbersome transaction effortless. Against fund-financing Not all LPs want accelerated liquidity from older vintage funds. Some LPs feel strongly against solutions like NAV loans and want GPs to wait and achieve liquidity through portfolio exits. These type of LPs are most likely a minority and benefit from highly diversified and distributive portfolios. Pro fund-financing Other LPs view fund-level financing solutions as accretive given they expect to re-invest the Verx proceeds into new funds which will most likely generate returns greater than Verx's cost of capital. In addition, the partial liquidity may allow the GP delay exits and sell portfolio companies off better performance or an improved market backdrop.

Verx modernized the preferred equity process to provide the borrower with an effortless and transparent experience. Cost Transparency Generally, existing processes are more lender friendly. Traditional lenders are incentivized to overcomplicate structures to bake in additional protections which makes it harder for the borrower to compare solutions and understand the true cost of capital. Streamlined Process The legal process could also be more streamlined. Verx leverages documentation already tried and tested in precedent transactions in an effort to standardize and speed up the closing process. Access Due to the iterative and resource intensive nature of these processes, traditional lenders are focused on scaling by pursuing the biggest deals. Verx's technology allows our partnered lenders to find scale in smaller transactions which also creates more access for borrowers.

We understand that all our partnered Sponsors are launching new vintage funds that will eventually become tail-end funds in need of liquidity. That is why we commit to continually underwrite our partnered funds so that at a moments notice they could access liquidity solutions. Our partnered lenders will have a firm view on the Fair Market Value (FMV) thanks to our underwriting resulting in quick turn-around times.