Can someone explain what a "pure promote" is in a waterfall structure? I know what a promote is. If the sponsor hits the defined hurdle then they begin to receive a larger % of profits. But I do not understand what is meant by "pure promote". For example, here is where I have seen the term used in a waterfall description:
85% LP / 15% GP 8.5% Preferred Return First Tier Promote: 68% LP / 32% GP (20% pure promote) Second Tier Promote: 60% LP / 40% GP (30% pure promote)
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The promote is the percentage of the Lp's prorata cf that they shift to the GP.
20%*85%= 17%.
GP Share = 15%+17%= 32%
What is the difference between "promote" and "pure promote"?
I would view them as the same, but I think some people might see "20% promote" and think that means the GP gets 20% of cash flows.
+1 - I have seen a good amount of people confuse it like this
Promote is cash flow beyond the GP’s pro rata share that he is entitled to. Ie cash flow to equity is based on percentage interest. Cash flow to promote is beyond that.
Promote is more general, whereas pure promote is specifically referring to the share of the LP’s cash flow to equity being given up to the sponsor. Straight split promote is fairly obvious. 80/20 straight splits sends 20% of all CF to sponsor.
I know what promote is, i work with various jv structures all of the time. You still did not answer my question though. I have never heard of "pure promote" before, I even asked a few colleagues and they had never heard of it either.
I believe "pure" is defining that there is no catch-up provision and the GP only receives carry on gain in excess of the preferred return hurdle.
https://www.duanemorris.com/site/static/private_equity_fund_distributio…
dont over complicate it...by pure it's just added nomenclature to define that the 20% is 100% of the promoted piece. meaning in that hurdle per your example, the GP gets 32%, of which 20% is pure promote...aka 100% of the promoted interest.
has nothing to do with catch ups, claw backs, or any other "special type of promote". If it did, one thing to look for is if it is bold and in quotes...if so, I'd say maybe check the definitions section to see how it's defined outside a tear off term sheet.
Simply, I think theyre just illustrating the % of the net return to the GP that is the promoted interest.
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