Promote Structuring - Heavy GP Commitment
If the GP puts down 30% of the equity stack, does it not make sense to structure the promote as 30% over an 8% preferred? Correct, me if I am wrong but wouldn't it be a true promote at all at that point since you are 30% of the stack and receiving 30% back of the profit (after the 8%)?
Not sure if I am following your question but assuming I am understanding it right. If GP puts in 30% and GP guys 30% promote then it's basically a pari passu deal and GP is not getting anything extra. No GP would agree to this because they don't make anything extra. GP would have to earn more than 30% because that additional excess is the GP entrepreneurial profit for doing the work.
Most structures would dilute LPs evenly, so the GP goes down to 21% after an 8 the LP would be 56% and the Promote is 30% so total CF to the GP would be 51%.
This is the correct answer. In most cases a 30% promote =/= 30% of total cash flow, it is 30% of each entity's cash flow including the GP themselves, which the GP then collects.
Would love to get the full math behind this -
LP and GP equity is pari, to 8% pref return they receive 70% / 30% pro rata. After 8% IRR, the GP receives 30% of the cashflow as promote, the remaining 70% is split pro-rata between the 70% and 30% shareholding, 70% * 20% = 21%. Add the 30% promote and you're at GP receiving 51% of cashflows above 8% IRR.
GP would get 30% before the pref. 30% of everything after 8% goes to the GP in additional to what they are receiving Pari Passu
Obviously get a lawyer to read this stuff, but the nature of the deal would be what I mentioned above
this makes sense if the deal is a HR no? get more of the $$?
I mean you can get a 30% split putting only 10% in, so GP total multiple is going down.
Promote happens outside of the deal level, so it doesn't multiply the same way when you put more of your own dollars in.
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