Co-GP Waterfall / Model Tests
Anyone have experience modeling Co-GP deals and waterfalls? Would appreciate any guidance as an upcoming case study will likely include this.
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Based on the most helpful WSO content, Co-GP waterfalls can be complex, as they often involve multiple layers of contributions and profit-sharing structures. Here are some key points and resources to guide you:
Understand the Basics of Waterfalls:
Key Considerations for Co-GP Waterfalls:
Resources for Modeling:
Case Study Preparation:
For additional guidance, you can explore resources like: - http://www.pircher.com/media/publication/50_SACArticle.pdf</a">Pircher Article on Waterfalls - https://www.lw.com/mediaCoverage/real-estate-joint-venture-waterfalls-a</a>…">Latham & Watkins on Joint Venture Waterfalls
These resources and tips should help you prepare effectively for your upcoming case study. Good luck!
Sources: Differences between Co-invest and Secondaries?, Best way to learn Real Estate Waterfalls?, https://www.wallstreetoasis.com/forums/qa-pevc-fof-principal?customgpt=1, https://www.wallstreetoasis.com/forum/real-estate/waterfallpromote-nuance?customgpt=1
I have underwritten a number of these. You should be able to model property level cash flow with leverage and a simple one or maybe two tier waterfall. Most often the case study is value-added multi in some more difficult case studies I have seen multi-tenant industrial.
The Co-GP's cash flow will be comprised of the pro rata portion of the GP cash flow and their percent of the promote share. It is important to distinguish if the GP equity pays promote or not. For example, assume a deal has a 90/10 LP /GP JV structure and there are 100 dollars left to distribute over the preferred return. In the first scenario assume all the equity is promoted. In this case the GP will receive their pro rata portion of cash flow (100*(10%*(1-20%))=$8 plus the promote ($100*20%)=$20. In the second scenario if only the LP dollars are promoted the GP's pro rata cash flow is not reduced by promote so it is $10=($100*10%), however, the total promote is smaller, $18=($100*20%*90%). In both cases the GP receives $28 but calculated differently.
This is relevant because in a typical co-GP deal the Co-GP partner will fund 50-80% of the GP equity and will receive 10-50% of the total promote earned. It is more accretive for the co-GP to not pay promote because the they would only receive back 10-50% of the dollars they paid in promote.
Happy to answer any other questions.
Can you explain what it means by the GP not promoting themselves? How is that the case if for example on a 90/10 JV they receive 20% promote over an 8% pref return?
Yes, If the both the GP and the LP both pay promote the math is as follows.
GP share of promote = $100*10%*20%= $2
LP share of promote = $10*90%*20% = $18
Total promote = $20
The GP is effectively paying themselves $2 of promote. This typically will not matter when there is only one GP on the deal since they will receive 100% of the promote. Now let's do an example where there is a co-GP involved.
Let's also assume the co-GP partner funds 80% of the equity and will receive 50% of the total promote.
In the first scenario, where both GP and LP equity pays promote. the co-GP partner would pay $1.6 of promote ($2*80%) and receive $10 of promote ($20*50%). The net promote received is $8.4.
In the second scenario, the GP does not pay any promote and receives $9 of promote ($18*50%). This is the better outcome for the Co-GP 9>8.4.
Hopefully, that clears things up.
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