RE Fund
. Do preferred rates pay off total invested capital or off total invested capital less the placement fee. For example, if there is a 5% placement fee on a 1 million dollar investment, does the preferred rates pay off the $1 million or 950K.
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Is everything going forward based off the $1 million or the $950K
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Assume a 8% preferred and a 60/40 split there after. Year 1 has a 20% return off of $1 million. So 200k for distribution. 8% preferred gets 80k. Then the 60/40 splits are 72k and 48k. Does that 72k get paid out as a divided, and the investor base investment remains at $1 million or does that 72k reduced the based investment. Basically, does the money distributed over the preferred rate go to paying down the investment or is it just an additional return.
Pref returns pay off invested capital - $1 MM here. Also, placement fee would be over and above $1 MM, i.e., invested capital = $1 MM, capital call / drawdown = $1.05 MM.
$1 MM
Pref returns are just like loans with flexible repayment. E.g. on a $1 MM investment @ 8% pref, interest accrued in year 1 = $80k. If Year 1 has a surplus of only $80 k, the "principal" remains @ $1 MM and you're entitled to another 80k at the end of yr 2. If Year 1 has a surplus of $100 k, 20k of "principal" is retired, so the "principal" gets reduced to $980k. If Year 1 has no surplus, the "principal" increases to $1.08 MM.
Forgot to mention, equity kickers like the 60/40 split would be after the entire "principal" on the 8% pref is retired and are additional returns
So in year 2 if the principal gets reduced to 980, is the pref calculated off the 980 or 1MM?
Pref calculated off the 980K
The pref is always calculated on the "principal"
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