Modeling returns for GP investors who aren't the development group

luv2speed's picture
luv2speed - Certified Professional
Rank: Gorilla | banana points 518

As a buyside analyst I normally see JV deals from the LP investor angle, but now as a favor for a developer friend I'm trying to model a deal in which the GP sponsor's 10% equity will be comprised of a bunch of smaller investors. This will be a JV deal with a promote, so what's the most straightforward way to model those smaller GP investor returns? I'll do a 10% preferred return for the GP investors, but how do I handle the promote? Should the developer get the whole thing, or will GP investors expect a piece of it in which case I should maybe just do a second waterfall for the GP investors? Thank you guys!

Comments (8)

Jan 22, 2018

I've seen deals where 100% of the promote is distributed through the GP waterfall and I've seen deals where 0% of the promote is distributed through the waterfall. What's market depends on the size of the deal and the sophistication level of your GP investors. I would anticipate giving up at least a portion of the promote. I would treat it just like ordinary cash flow from a capital event in your model.

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Best Response
Jan 22, 2018

Will the syndicated GP investors receive the same return structure as the LP? If so, you could just duplicate your waterfall to the GP investors and line up the amount distributed to each investor based on their contribution % and have the developer get 100% of the promote. You can also just make the promote a dynamic cell, that way you can change your assumptions.

We've had several deals where we had multiple small investors (friends & family) make up the 10% GP equity, so I have a few different models I can share with you if you need.

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Jan 22, 2018

I would think they'd be sharing in the promote, otherwise they could just be an LP. I would structure one waterfall to show just the GP and LP splits at each hurdle, and then do another section or tab to show the GP waterfall.

Jan 22, 2018

Thank you guys! I agree, I think they're going to want to share in the promote, so I'll treat it as a capital event and distribute through the GP waterfall.

Jan 22, 2018

I would structure them as LP's, but allow a split of the promote share to each to be toggled. In the event that your friend says he will give he investors 20% of the promote, you'd be good to go this way. He really shouldn't say anything he told them they can expect project level returns. They aren't adding any value aside from their capital so why would they be promoted?

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Jan 23, 2018

Usually the sponsor will have their own deal with investors who invest in the GP platform. So you would take whatever CF the GP side of the deal is getting and run it through its own structure.

We do a lot of deals like this and it's awesome because you're essentially getting promoted twice.

Jan 22, 2018

CF on the GP side of the deal including the promote, right? That's because what I'm doing now and splitting profits 50/50 after a preferred return, so basically a second promote.

Jan 23, 2018
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