Management incentive plans can misalign returns between the PE fund and management, especially if managements receive equity, which is equally ranked to the PE fund equity and the investment exit happens at a loss. This can weirdly result in management making a gain. While the PE fund suffers a loss.

To resolve this, the PE fund may contribute capital to the deal in a mix of equity and preference shares, or sometimes called a shareholder loan with a fixed interest rates. At exit preference shares are repaid with interest to the PE fund first. This is the crucial step. Any remaining exit proceeds are distributed between the PE fund and management. It's designed so that management gains when the PE fund gains and management suffers losses when the PE fund suffers losses. As a result, management and the PE funds both have their interests aligned again.