How to value promote/carry
How do you value the current value of a promoted position or carry. Say you have 5% ownership once all equity has been repaid to invested capital before you start seeing a return.
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I like to keep it simple. If you sold the property today at a market rate, paid off all debt and ran the equity proceeds through the waterfall, what would you receive? That's the easiest and most accurate way in my opinion. You could do something more complex like a 5 or 10-year projection with a sale at the end, run it through the waterfall and do a DCF on your cash flow stream, but that's subject to a lot of assumptions way out in the future, so less reliable.
Appreciate this. I was thinking along the same lines. Would there be a discount factor involved? Assume that someone wanted to buyout your carry/promote
If someone wanted to buyout my promote, I'd run a very rosy DCF and not apply any discount. If I was trying to buy someone else's promote position, I'd compare their position based on the simple method and a very conservative DCF with a discount applied to both since I'm giving them liquidity they wouldn't otherwise get and the risk involved with actually receiving that promote someday. If I am doing it for my own knowledge or a PFS for a bank, I'm doing the simple method.
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