The exit waterfall on a storage fund looks reasonable until the GP pulls a promoted interest on gross proceeds instead of net
A developer described a deal to me this week where the limited partners put in 80 percent of the equity, the GP contributed nothing but the deal and the operating work, and the promote kicked in on gross sale proceeds before the preferred return was fully satisfied. The number that triggered it was the total sale price, not the amount left after debt repayment and return of capital. On a $12 million sale with $7 million of outstanding loan principal, the GP took a 20 percent promote on $12 million, not on the $5 million of equity proceeds. That is a $2.4 million promote against a $1 million promote, and the difference came entirely from how the waterfall was written.
The mechanics matter more than the percentage. A 20 percent promote calculated on net equity proceeds after a 7 percent preferred return is a very different instrument than a 20 percent promote on gross proceeds with a soft preferred. Both are described in pitch decks as "standard GP economics." The version that matters is in the limited partnership agreement, specifically in the distribution waterfall section, and the definition of "distributable proceeds" is the sentence that determines which number gets promoted.
Storage funds at capital scale have started using continuation vehicles and partial recapitalizations as liquidity events, which creates a second version of this problem: what counts as a realization event for promote purposes when the asset does not actually sell? A fund that rolls a facility from Fund I into a continuation vehicle at a self-determined NAV and then calls it a promote trigger has structured a situation where the GP earns carry on an appraisal.
The question I would put to anyone evaluating a storage fund right now: what is the exact definition of "gross asset value" or "distributable proceeds" in your waterfall, and does the promote attach before or after debt is subtracted?
