Including Preferred Return in Project Level IRR?
Modeling a deal that includes preferred equity- do you guys show the pref in a project level IRR calculation?
Additionally, what is shown in pref investor vs GP level returns
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Not entirely clear if you mean preferred equity (ranks senior to ordinary equity), or a preferred return on ordinary equity. If pref equity, model it like debt i.e. project returns are post service of pref equity. If you mean preferred return on ordinary equity, don't show it in project level returns as it's an ordinary equity waterfall component.
Sorry for being unclear. The capital stack consists of debt, pref equity, and sponsor equity. If I'm showing project level levered IRR and equity multiple (for both owner and pref investor), the line items I'm summing up are:
Capital contribution (negative value)
Operational Cash Flow
Terminal Transaction
Preferred Return
So you're saying to leave out the preferred return?
In this case I'd include it as it essentially sounds like project returns = sponsor returns based on this stack. How does the pref equity work, is it a fixed pref return or do they participate in upside?
We're talking to a few groups but the main group part current pay part accrued at capital event, no participation in upside.
Couldn't you also treat the pref more as debt? Ie assume just sponsor equity and take pref principal out at capital event?
Yes model it like debt, project returns are just the sponsor returns in this case as that's the return to the ordinary equity. CREnadian has covered it well below.
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