LPs/Investor Return Structure
I understand how a Real Estate PE firm works when raising investor money.
In PE and VC, is the return formula similar? If I commit 1m dollars, do I receive a quarterly or monthly preferred return and anything over the hurdle rate is a waterfall structure? Also how is the preferred return calculated? CoC?
In PE, whenever talks about the IRR, does that number result only AFTER the sale of the company? how does the waterfall come into play if the company isn't sold until the 7th year for example. Any clarifications on the return structure to the LPs would be helpful. Thank you.
Hi yayaa, any of these threads helpful:
No promises, but sometimes if we mention a user, they will share their wisdom: 0tter captain ahab chriscalder
Fingers crossed that one of those helps you.
bump
Bump
bump
Cash flows to LP's only occurs at the time of a dividend initiated by the GP (typically div recaps given that loan covenants usually don't allow dividends until the loans are repaid) or a liquidation event. IRR is based on all cash flows in the fund, which includes dividends.
Standard structure, depending on PE or VC, then strategy dependent (some lower beta strategies will have lower carry %.
LP side letters can change economics but the above is what you would consider standard for PE. VC may have no preferred return and/or perhaps a 25% GP carry.
When calculating waterfalls, the entire fund's lifetime performance is considered. For example, a fund that buys an investment in year 1 and does not exit until year 7 would have to satisfy a relatively larger preferred return hurdle before reaching carried interest payout. Conversely, if a fund acquires several assets in year 1 and has exits earlier in its life will have reduced is preferred return obligations earlier and likely an exit in year 7 will see more of the profits flow through to the GP.
EDIT: some public pensions make their PE annual reports public and you can find fund economics in the footnotes typically
Libero omnis est qui quas id vitae. Reprehenderit qui laudantium tempore repudiandae consequatur. Nihil tenetur nihil expedita nihil numquam sit omnis non.
Enim et rerum accusamus aperiam. Qui sit consequuntur quas impedit animi et culpa. Occaecati explicabo sequi molestias hic voluptas. Voluptas iste eveniet sint vel optio unde doloremque dicta.
Atque voluptates sint nemo dolorum nisi voluptatem eum sunt. Est aspernatur voluptas sunt voluptatem.
Eveniet accusamus laborum sint molestiae ullam consequatur qui. Quia et officiis nisi mollitia omnis consequatur. Ea at sed consequuntur deserunt fugit earum quam. Molestias voluptas autem at laudantium.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...