LPs/Investor Return Structure
I understand how a Real Estate PE firm works when raising investor money.
In PE and VC, is the return formula similar? If I commit 1m dollars, do I receive a quarterly or monthly preferred return and anything over the hurdle rate is a waterfall structure? Also how is the preferred return calculated? CoC?
In PE, whenever talks about the IRR, does that number result only AFTER the sale of the company? how does the waterfall come into play if the company isn't sold until the 7th year for example. Any clarifications on the return structure to the LPs would be helpful. Thank you.
Standard structure, depending on PE or VC, then strategy dependent (some lower beta strategies will have lower carry %.
LP side letters can change economics but the above is what you would consider standard for PE. VC may have no preferred return and/or perhaps a 25% GP carry.
When calculating waterfalls, the entire fund's lifetime performance is considered. For example, a fund that buys an investment in year 1 and does not exit until year 7 would have to satisfy a relatively larger preferred return hurdle before reaching carried interest payout. Conversely, if a fund acquires several assets in year 1 and has exits earlier in its life will have reduced is preferred return obligations earlier and likely an exit in year 7 will see more of the profits flow through to the GP.
EDIT: some public pensions make their PE annual reports public and you can find fund economics in the footnotes typically