Interim Promote
So I was speaking to a friend and he says his company does an interim promote (rather than a crystallization). Basically, it's when a recap event occurs (refi or supplemental loan), they agree on a value and run it through the promote model. They calculate a total promote and pay themselves half of it out of the proceeds from the capital event. When they eventually sell, the interim promote amount they paid themselves is subtracted from the full promote amount calculated at sale.
Has anyone heard of this structure? Does your shop do it? Would you rather have this or crystallization?
LPs go for this?
I've heard of this occurring, usually when the proceeds of re-finance are going to send significant return of capital to the LPs (like in major opportunistic deal). Is the promote subject to clawback/trueup at the end of actual value is less than was distributed earlier (such as from return of GP capital)?
Good question. I didn't ask so not sure. I would think a situation like that would be rare however, since they are only paying themselves half of total promote at the time of the capital event.
My understanding is they are doing more deep value add/distressed. They are buying w/ a floater and then refi into agency after a couple of years. I imagine at the refi they are assuming a big cash out. I wonder if they had a second capital event (supplemental loan on top of the fixed rate refi) if they would pay themselves again.
What do you make of this structure? I think I prefer it to crystallization because you have an opportunity to increase your promote at the end of the hold vs. taking it all at the refi (theoretically a lower promote $$). But also with crystallization you get it all at the refi and of course time value of money
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