GP/LP Waterfall Terms
Hello there. Curious if those familiar with GP/LP structures have seen situations where the GP asks for an outsized return in excess of a 50/50% split? For instance, if the IRR goes above some very high hurdle (25 or 30%), is it customary for the GP to ask for some figure well in excess of 50%.... say 60% to GP (with 40% to LPs), or even 75% for the GP (with 25% to LPs)?
I've run through a dozen or so comps I've pulled from friends in the space and it always feels like the GP is typically capped at a 50/50% split. I'd love a bit of guidance on what you all view as customary....
This is for a light transition portfolio project where the base case IRR is in the high 20s. It's a niche asset class with tons of potential upside as the exit cap in the base case is extremely conservative (assumes sale of collateral at cost). The GP expects cap rates to compress as the asset class becomes more mainstream and would like to capture that potential.
I’ve seen it when it is outside the ‘main’ sectors (office/retail/industrial/apartment). Generally in both the mobile home park and self storage space, there are less operators raising ‘PE’ capital. They raise via, syndicates where you can get better terms. Also, in these areas of the business, as the rental rates are smaller and deals are smaller, the fees are smaller. The operators still need to keep the lights on - so the fees need to be larger to compensate. In these two spaces, I’ve not only seen a 50/50 split post a certain IRR, but I’ve also seen an 8% pref non cumulative non compounding, and above an 8% each year, the cash flows get split 50/50. Additionally, 50% of the cash that goes to the LP above the pref pays down their Capital account - which means the pref gets lower the following year.
Very helpful, thanks. The asset class in question doesn't quite fit into the main food groups asset classes (today) so your color is very helpful.
This will be a 50mm equity fund so expecting the investors will need to be large family offices and a smattering of more creative institutional shops given size of cheques... The thought is a more traditional waterfall will have to suffice for keeping the sophisticated groups happy.
Initial Thinking is below. Would love if anyone can comment on if this feels "market" for a fund that in the "light transition" space. I would score the asset class and business plan a 6/10 on the risk spectrum, with that risk due primarily to asset class illiquidity (10 being riskiest). Below has 5 hurdles which also seems to be off market to me?
GP investing 10% of 50mm Fund;
10% Preferred Return (10% GP / 90% LP)
15% IRR (30 GP / 70% LP)
20% IRR (40% GP / 60% LP)
25% IRR (50/50)
Beyond 30% IRR (65% GP / 35% LP)
The hurdles don’t look crazy to me. But how likely is it you’ll get to a 30% IRR? It’s really rare unless you have a sub 2 year hold period. Also, what asset class is it? And on top of that, if you do get to a 30% IRR, do you really care that you’re only getting 35% at that point? Sure, you’ve been diluted, but where else are you get a 20%-25% IRR post dilution? If the operator is getting a deal level 30%, they deserve to get paid a crazy sum.
Agreed for a niche asset class. How is pref calculated here?
Thinking was the 10% preferred return and capital return would be pro-rata. Haven't gotten into catch-up provisions or the like just yet but that is the next step.
This is just a touch over 3.5 years. Think the 30% at the vehicle level is fairly achievable at this point. I would center a bell curve around ~27.5% IRR with a long tail in both directions (more heaivly weighted to upside). The moonshot case I've built for them where the cap rate illiquidity premium on this niche asset class tightens from a +400bps premium to a +200bps premium (to placebo) results in a 40+ irr over 3 years but its impossible to guess if the niche will mature like that.
Long story short, it feels like asking for more onerous splits above a moonshot IRR (say 30%) isn't a crazy concept. Thanks a ton pudding.
What niche is this? Can you share? Just curious what product type this is.
Just had a partner turn down an off market offer for a value-add office project that would have returned a 30+ LIRR on the project level…. Not all LPs are so grateful 😅
Lol. Maybe they didn’t believe it could actually achieve 30%? There has never been more lies written than in excel.
30%+ IRR is very achievable, you just need to know where to look outside your major food groups-multiphase developments in non-urban infiled locations, crazy binary entitlement risk, office condo Conversions. I know a few funds that target deals with 20%+ unlevered IRR, With leverage you get a 40% IRR. I have found that the people that win deals and make crazy money in this business look at the deal and see yellow when everyone else sees green. Apple store on 5th avenue is the best example. They pay $80 Million in rent for basement space. Should we do parking? or get the biggest company in the world to pay the highest retail rent?
Yes, but look at the risk you are taking. I totally agree with you - but that’s why it’s 20% unlevered - it is a binary risk and if you didn’t get apple - there weren’t that many more companies behind them that could pay the same rent with the same credit to make the same money on the backend. It could have just as easily been $0.
This is kind of silly. The Apple Store is widely considered one of the most genius, creative moves in NYC real estate in years. It's sitting way at the end of the scale in terms of being an outlier. I agree that such things can drive a ton of value, but there just aren't that many opportunities for such a deal.
And in any case, there is risk. I have no idea what funds you know that are currently targeting a 20% unlevered IRR, but I'd be curious to know how often they hit that. Yes, you can make huge returns - GP funds going into condo buildings in NYC in 2013 probably did that well! But there is commensurate risk. GP funds going into condo buildings in 2018 are probably trending in the low single digit returns, if that.
To the OP's point, the larger a return hurdle you're giving an LP, the more justified you are in taking a bigger promote. If someone told me I'd get a 30% return as my first hurdle, I'd be happy to give them 100% of the upside. I mean, my first thought was that I was being scammed or the deal didn't make sense in some way, but you get it
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