Preferred return is a priority return (often in the 5-10% range) that is paid to investors prior to any profit sharing or promote to the sponsor. Preferred returns are common in limited partnership structures in order to entice limited partners to invest. Since the general partner typically has the ability to earn a disproportionate share of the investment return (see Promoted Equity) it reasons that the limited partners should receive a priority return on their investment.
For example, the limited partners may receive a 7.0% preferred return on their investment prior to the general partner receiving any cash flow or profits, even if the general partner has also contributed equity to the partnership.
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