Distribution of GP Promote - first investment on GP side

Hey guys - I was invited into a family and friends pool in a GP syndication for a very interesting deal. I have never been on this side of the table, but I am surprised by the structure, particularly that 100% of the Promote goes to the key principal of the sponsor company, and is not shared with any of the GP investor members. Using simple numbers:

  • Deal is a 90/10 equity split (90% institutional LP, 10% GP syndication - of which I am a part of)
  • Underwritten levered deal-level return is 3.2x and a 30% IRR
  • Institutional LP return is a 2.7x and a 25% IRR (diluted a because of the promote)
  • GP Investor member return is also 2.7x and a 25% IRR (GP syndication is pari passu to LP, and GP investor members are getting none of the promote)
  • Key Principal of GP syndication is getting a 23.13x and 99% IRR (getting 100% of promote despite being only 25% of GP syndication)

Is it common for 100% of the promote to go to the Key principal? I understand he is signing the loan carve outs and running the show, but I assumed at least some of the promote is typically share among the investor members of the GP syndication. Still a great return for the investor members nonetheless.

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Comments (69)

  • VP in RE - Comm
Oct 19, 2021 - 9:56am

That's what I thought, which is why I am asking. Seemed very bizarre. Only counterpoint I can see is the KP saying he is the one taking most of the risk, which is true. 

Oct 19, 2021 - 10:57am

Garbage splits.  Tell them to fuck off. They want to share liability with other parties but don't want to share in the rewards from that.

Remember, being a GP memeber opens you up to liabilities that go beyond just the loan.  Also a crafty lawyer at the bank could tie you into the loan even if you aren't a listed cosignatory.  

Oct 19, 2021 - 10:57am

Doesn't make a lot of sense. You are essentially a Co-GP here which means you would be entitled to all the GP benefits dollar for dollar. Why invests at the GP level and get LP returns? You would all get a cut of the promote.

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  • VP in RE - Comm
Oct 19, 2021 - 11:31am

Well I should have clarified; there is really no additional risk from being a GP investment member and an LP. It's a pari passu JV, no "priority" pref return, just hurdles that enable a promote. I am also not required to contribute to any additional capital calls, my share would just get diluted if i dont. My name is also not on the loan carve-outs. 

Most Helpful
Oct 19, 2021 - 11:53am

Ok so you're essentially just a LP then. I think the only reason the GP is doing this is because they're not being honest. They probably don't want to put up 10% of the equity or they dont have it and are including friends and family to fill the gap. However, the friends and family are actually just LPs. Nobody is getting any promote. So basically the structure is not 90/10, its more like 97.5/2.5, which is very little skin in the game for the actual GP. I would either bail or do more due diligence, something seems off.

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  • Associate 1 in RE - Comm
Oct 19, 2021 - 11:22am

This is backwards. The GP asked you to share in GP risks and help him raise a GP fund but is giving you LP returns? I wouldn't do any more deals with this person…

  • Associate 1 in RE - Comm
Oct 19, 2021 - 12:14pm

That is good to know. That being said, you are still helping him reduce his capital exposure and should be rewarded more than the LP.

Oct 19, 2021 - 1:01pm

There is capital stack risk...which is what RISK IS...guarantee of return of capital or payment, also liquidation preference.  This the one of the reasons why LPs make lower returns, because they sit lower in the capital stack, less exposure.."more sure thing".  You are sitting with more exposure to loss of capital and are getting lower returns.  You are in a worse spot than the LP partner, you have much more risk.

Oct 19, 2021 - 3:47pm

I've never seen a situation where a GP investor gets LP returns. Call a spade a spade if you're gonna be shady. Crock of shit structure.

We have a GP fund and our investors absolutely participate in the promote that comes in from the deal, but we have our own waterfall with them. If we offered them LP returns, why would they ever invest lol in our fund over an LP position? Makes no sense. 

  • VP in RE - Comm
Oct 19, 2021 - 3:54pm

To answer your question:

  1. the risk for this particular deal is pretty much the same whether i am on the LP side of GP investor member. The LP is JV equity, full pari passu.
  2. How do i invest $50-100k on the LP side? They are a large institutional fund with institutional capital. Not to mention, I'd rather invest deal by deal than in a fund structure.
Oct 19, 2021 - 9:43pm

I mean, this is market and what you'd expect. You don't get promote if you're not doing the work, calling it a GP syndication may have mislead you. You're being offered access to invest in the deal, not access to invest in the GP or be a GP. The GP is just giving you a piece of their allocation.

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Oct 19, 2021 - 11:54pm

Simply put so long as it was fully disclosed, which it appears it was, there is nothing wrong with this deal. Its symbiotic relationship - the guy is helping himself bridge the GP gap that he is short on, and friends and family are getting access to a deal they'd normally never get. Win-win. Different layers are added to keep risk separate. This is common enough in smaller deal sizes, certainly guys putting together their first few deals before they really have the money to take on the full GP interest. It only gets shady if other parties don't really know and its more of a wool over their eyes with language hidden in the docs.  

Oct 20, 2021 - 12:21am

This is perfectly common. He's syndicating out the GP. As someone else said, you're just an LP when it comes to economics. Sometimes the LPs understand this, sometimes they're less in tune with how much of the GP the principal is actually putting up, but I've never heard of someone giving away their economics to the syndicate. In fact it's usually the opposite. Sometimes as the institutional LP, if our splits aren't as good as the GP wants, we'll let them take more of the deal, so they can syndicate more to friends and family where they get better splits. Multi family syndicators are getting 50% over a 6% IRR in todays world… so of course he's keeping all the promote, you're just lucky to get a chance to invest in a private market deal….

Oct 21, 2021 - 5:27pm

This structure is common. What wouldn't be common is for someone to market the investment opportunity as GP equity, but when you get into the JV docs, you realize that your money is actually being promoted (the complete opposite of getting a piece of the promote upside). If this is the case: run away!

The company I work for was originally formed as a friends and family Fund. The (discretionary) Fund equity was used as our GP equity for our one-off investments we did with institutional capital partners. When we showed our waterfalls to the potential capital partners, our standard practice was for us to bifurcate GP returns between GP LP Co-invest (all of GP cash; earns same return as other LP /institution) and the GP Promote (no cash, just promote based on waterfall). I've seen other firms look at the GP based on the GP co-invest + promote, which is more appropriate for an LP member to look at what their GP member is generating (less appropriate for GP if they get their cash from friends and family, and then have a completely different payout structure with said friends and family.. aka no promote sharing).

As long as you disclose what your structure is to your investors, the sky's the limit on how to structure the deal (pref equity, mezz debt, the typical common equity jv structure, etc.). You just need investors to by into your risk adjusted return... I've even closed a deal where the preferred return was high single digits, but after the preferred return, 80% of every dollar went to the general partner (with the remaining 20% going to LPs). 

And for those who are shocked that there are companies who raise a friends & family fund, and then use this $ to fund a GP piece of a JV with X capital partner: and then be upset to find out that the company does not share any of the promote with their friends & family investors.. you need to understand that the company is taking on more risk, signing guarantees (sometimes personally), and may be subject to cost overruns etc. etc. etc. 

For us to keep interests aligned with our investors, we would share a certain % of the project-level promote with these investors. Ultimately, this sharing would typically be netted out after these cash flows (LP Co-Invest, plus share of promote) were sent through our friends and family fund waterfall. Occasionally investors would end up with more dollars than what they would have gotten if cash flows were just sent through the fund waterfall. It is all dependent on the terms of the project JV waterfall vs. Fund waterfall.

Nov 2, 2021 - 1:45pm

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