JV Relationships and Financial Models

To those at capital allocator LP's - do you share your financial models with your operating partners?

I'm at a GP where we usually put up 10-15% of the equity and I've run into two scenarios: (1) total transparency where we shoot our models back and forth - usually on the development deals and (2) we share our models and the partner keeps their view almost hidden. In the latter scenario, what's the logic behind this? I've only experienced this once but there was a real aversion to showing cards. Is this strategic from a negotiation standpoint (e.g. hurdle and promote tiers)? Any clarity would be helpful.

Comments (4)

 
Nov 16, 2018 - 11:53am

I'm at a LP. We provide equity for developments and acquisitions. Frankly, I have never had a GP ask for our models before. Why would they?

They send us a deal, and if we are interested in it, they send us the model. I go through the model to understand their numbers, and then I create our own model that matches their assumptions. So i get to the point where my model outputs matches (or closely matches) their outputs. From there we really just play "what if's" and I also add a waterfall. I tweak typical assumptions (exit, growth, rents, lease up, interest rates, so also reserves opex deficit) and see how it it affects project IRR and also LP IRR, and adjust waterfall accordingly. We create our own models to push for added reserves, mostly. Why front 100% of a capital call when we can just beef up reserves so lender helps pay for unforeseen costs? LTC is a beautiful thing.

I'm not sure why the GP would want or care to see LP's model. Our model is really just there for internal committee approval process.

 
Nov 16, 2018 - 6:55pm

I've seen this before. LPs won't always share it for a few reasons but the main one I've run into is it "shows their cards." Let's assume there is a buy-sell in the JV after 3 years and the LP expects to hold the deal for 10 years without the GP. If the GP sees the LP's model, the GP will now see how the LP might be thinking and their valuation methods / strategy. They will know how they look at a deal. This is less leverage when it comes times to execute the buy-sell and negotiate the purchase / sale prices.

 
Nov 17, 2018 - 7:48pm

I agree with Pudding's response. Buy-sell values are a major factor.

Also I've worked at an LP where Operating Agreement was so poorly written, language around capital accounts and distributions could be interpreted a few ways. So when it comes time to sell, we want to see GP's distribution projection first to see if they're interpreting language more favorable to us. Even if we didn't agree with their calc, we'd take the money for sure

Operating agreements are not usually so difficult to understand but in this case we bought out an entity and inherited the operating agreement and capital account balances, so we weren't involved in negotiating language.

Side note on JV agreements, the written language in the doc always trumps any example calculations used in an exhibt if there's a conflict.

Francisco
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