Understanding Funding Dynamics: Common vs Preferred Equity and Blue Owl's Strategic Allocation

Feb 7
3 min read

Funding a company involves choices that shape its growth, control, and returns. Among these choices, deciding between common equity and preferred equity stands out. These two types of equity offer different rights and risks, influencing how investors and companies interact. This post explores the key differences between common and preferred equity, how Blue Owl Capital approaches these funding options, and how large funds allocate their wealth. We will also look at the behavior of general partners (GPs) and limited partners (LPs) in this context.

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Eye-level view of a financial report showing equity allocation charts — Equity allocation charts in a financial report

What Is Common Equity?

Common equity represents ownership in a company. Holders of common equity, often called common shareholders, have voting rights and can influence company decisions. They benefit from the company’s growth through dividends and capital appreciation. However, common equity holders are last in line during liquidation, meaning they get paid after all debts and preferred shareholders.

Key features of common equity include:

Voting rights on major company decisions
Potential for dividends, but not guaranteed
Residual claim on assets after debts and preferred equity
Higher risk but higher potential reward

Common equity suits investors willing to take risks for long-term growth and influence.

What Is Preferred Equity?

Preferred equity offers a hybrid between debt and common equity. Preferred shareholders receive fixed dividends before common shareholders get any payout. They usually do not have voting rights but have priority in liquidation. This makes preferred equity less risky than common equity but with limited upside potential.

Important aspects of preferred equity:

Fixed dividend payments, often cumulative
Priority over common equity in dividends and liquidation
Limited or no voting rights
Convertible options in some cases to common equity

Preferred equity appeals to investors seeking steady income and lower risk.

How Blue Owl Capital Approaches Equity Funding

Blue Owl Capital, a leading alternative asset manager, uses a balanced approach to equity funding. The company invests across private credit, direct lending, and equity strategies, tailoring allocations based on risk and return profiles.

Blue Owl’s strategy includes:

Allocating capital between common and preferred equity depending on the investment stage and sector. For example, in mature companies, preferred equity may dominate to secure steady returns.
Using preferred equity in direct lending deals to provide downside protection while capturing equity upside.
Engaging with GPs and LPs to structure deals that align interests and risk tolerance.

This approach allows Blue Owl to manage risk while pursuing attractive returns for investors.

Close-up view of a portfolio manager analyzing equity investment data on a laptop — Portfolio manager reviewing equity investment data

How Big Funds Allocate Wealth Between Equity Types

Large funds, including pension funds and sovereign wealth funds, allocate their capital carefully between common and preferred equity. Their decisions depend on factors such as:

Risk tolerance: Preferred equity suits conservative allocations seeking income stability.
Return expectations: Common equity fits growth-oriented allocations aiming for capital gains.
Portfolio diversification: Combining both equity types balances risk and return.
Market conditions: In volatile markets, preferred equity may increase to reduce downside risk.

For example, a pension fund might allocate 60% to preferred equity for steady income and 40% to common equity for growth potential. This mix helps meet long-term liabilities while capturing upside.

Behavior of General Partners and Limited Partners

General partners (GPs) manage funds and make investment decisions, while limited partners (LPs) provide capital but have limited control. Their behavior reflects their roles and interests:

GPs prefer structures that align incentives, often favoring preferred equity to protect downside and common equity to share upside.
LPs seek transparency and risk management, often pushing for preferred equity cushions to safeguard their investments.
Negotiations between GPs and LPs shape deal terms, including dividend rates, conversion rights, and liquidation preferences.
Performance fees for GPs often depend on common equity returns, motivating them to pursue growth.

This dynamic ensures a balance between risk protection and reward sharing.

Practical Example: A Tech Growth Fund

Consider a tech growth fund managed by Blue Owl. Early-stage startups often issue common equity to attract investors willing to take risks for high returns. As companies mature, Blue Owl may negotiate preferred equity terms to secure steady dividends and downside protection.

In this fund:

Early investments are mostly common equity, capturing growth.
Later rounds include preferred equity with dividend rights.
GPs structure deals to balance investor interests.
LPs receive regular updates on equity performance and risk exposure.

This example shows how equity types serve different purposes across a fund’s lifecycle.

Key Takeaways for Investors

Understand your risk and return profile before choosing common or preferred equity.
Preferred equity offers income and protection but limits upside.
Common equity provides control and growth potential but carries higher risk.
Blue Owl’s approach balances these factors to meet investor goals.
GPs and LPs play distinct roles in shaping equity structures and outcomes.