Distribution of GP Promote - first investment on GP side

What’s the point of coming into the GP if you’re just getting the LP returns? I would expect you to share some promote upside and he/she keeps all the fees. 

Garbage splits.  Tell them to fuck off. They want to share liability with other parties but don't want to share in the rewards from that.

Remember, being a GP memeber opens you up to liabilities that go beyond just the loan.  Also a crafty lawyer at the bank could tie you into the loan even if you aren't a listed cosignatory.  

Doesn't make a lot of sense. You are essentially a Co-GP here which means you would be entitled to all the GP benefits dollar for dollar. Why invests at the GP level and get LP returns? You would all get a cut of the promote.

This is backwards. The GP asked you to share in GP risks and help him raise a GP fund but is giving you LP returns? I wouldn’t do any more deals with this person…

I've never seen a situation where a GP investor gets LP returns. Call a spade a spade if you're gonna be shady. Crock of shit structure.

We have a GP fund and our investors absolutely participate in the promote that comes in from the deal, but we have our own waterfall with them. If we offered them LP returns, why would they ever invest lol in our fund over an LP position? Makes no sense. 

I mean, this is market and what you’d expect. You don’t get promote if you’re not doing the work, calling it a GP syndication may have mislead you. You’re being offered access to invest in the deal, not access to invest in the GP or be a GP. The GP is just giving you a piece of their allocation.

Simply put so long as it was fully disclosed, which it appears it was, there is nothing wrong with this deal. Its symbiotic relationship - the guy is helping himself bridge the GP gap that he is short on, and friends and family are getting access to a deal they'd normally never get. Win-win. Different layers are added to keep risk separate. This is common enough in smaller deal sizes, certainly guys putting together their first few deals before they really have the money to take on the full GP interest. It only gets shady if other parties don't really know and its more of a wool over their eyes with language hidden in the docs.  

This is perfectly common. He’s syndicating out the GP. As someone else said, you’re just an LP when it comes to economics. Sometimes the LPs understand this, sometimes they’re less in tune with how much of the GP the principal is actually putting up, but I’ve never heard of someone giving away their economics to the syndicate. In fact it’s usually the opposite. Sometimes as the institutional LP, if our splits aren’t as good as the GP wants, we’ll let them take more of the deal, so they can syndicate more to friends and family where they get better splits. Multi family syndicators are getting 50% over a 6% IRR in todays world… so of course he’s keeping all the promote, you’re just lucky to get a chance to invest in a private market deal….

This structure is common. What wouldn't be common is for someone to market the investment opportunity as GP equity, but when you get into the JV docs, you realize that your money is actually being promoted (the complete opposite of getting a piece of the promote upside). If this is the case: run away!

The company I work for was originally formed as a friends and family Fund. The (discretionary) Fund equity was used as our GP equity for our one-off investments we did with institutional capital partners. When we showed our waterfalls to the potential capital partners, our standard practice was for us to bifurcate GP returns between GP LP Co-invest (all of GP cash; earns same return as other LP /institution) and the GP Promote (no cash, just promote based on waterfall). I've seen other firms look at the GP based on the GP co-invest + promote, which is more appropriate for an LP member to look at what their GP member is generating (less appropriate for GP if they get their cash from friends and family, and then have a completely different payout structure with said friends and family.. aka no promote sharing).

As long as you disclose what your structure is to your investors, the sky's the limit on how to structure the deal (pref equity, mezz debt, the typical common equity jv structure, etc.). You just need investors to by into your risk adjusted return... I've even closed a deal where the preferred return was high single digits, but after the preferred return, 80% of every dollar went to the general partner (with the remaining 20% going to LPs). 

And for those who are shocked that there are companies who raise a friends & family fund, and then use this $ to fund a GP piece of a JV with X capital partner: and then be upset to find out that the company does not share any of the promote with their friends & family investors.. you need to understand that the company is taking on more risk, signing guarantees (sometimes personally), and may be subject to cost overruns etc. etc. etc. 

For us to keep interests aligned with our investors, we would share a certain % of the project-level promote with these investors. Ultimately, this sharing would typically be netted out after these cash flows (LP Co-Invest, plus share of promote) were sent through our friends and family fund waterfall. Occasionally investors would end up with more dollars than what they would have gotten if cash flows were just sent through the fund waterfall. It is all dependent on the terms of the project JV waterfall vs. Fund waterfall.