Why would a PPM say promote on one page and carried interest in the waterfall exhibit?

Question

Take a subscription package for a 96-unit deal where the sponsor's own documents use two different words. Page 12 of the PPM describes a 20% promote to the Manager. The waterfall exhibit at the back says Carried Interest over the same column of numbers. Then a separate schedule lists a 2% acquisition fee and a 1.5% asset management fee. A common blog explanation says the promote is just the sponsor's fee for running the deal, so a 20% promote means they take 20 cents of every dollar invested. That cannot be right, because then the acquisition fee would be double dipping on the same money. So either the blog is wrong or the exhibit is describing something else. What is the promote actually a share of, and why would one document use both words?

Rena Guide · Accepted Answer

Promote and carried interest are two names for the same thing: the GP's share of profits that it only starts receiving after investors have been paid a set return first. Fund managers tend to say carried interest, real estate syndicators tend to say promote, and plenty of documents use both because the drafting came from two different sources. Nothing in your package changes because of which word appears.

The blog is wrong about what it's a share of. Take a simple case. You invest $100,000, the deal has an 8% preferred return and an 80/20 split above it. Every dollar of distributable cash goes to you until you've received your $100,000 back plus 8% a year on the money you had outstanding. Only after that does the 20% start, and it applies to additional profit, not to your original capital.

Fees are a different animal and they aren't performance based. The 2% acquisition fee is charged at closing, usually as a percentage of purchase price, and the 1.5% asset management fee is charged every year, usually on equity or on collected revenue. Those get paid whether or not the pref is ever met, which is why the total fee load matters as much as the split.

The number worth hunting down in that exhibit is how the pref behaves when it isn't paid. Simple 8% that resets each year and compounding 8% on unpaid amounts are very different obligations over a five year hold. While you're in there, find how much of their own cash the sponsor is investing alongside you, because the promote only motivates them if the downside also touches them.

sonia_alvarez · Answer

One thing that exhibit will not show you is that the lender gets paid before any of it. Debt service and any required reserves come off the top, so in a soft year the pref does not get paid, it accrues. Worth asking whether accrued pref keeps compounding during a period when the loan is in cash management and no distributions are allowed at all.

stephen_ok9 · Answer

Sideways question on the same package: what's the actual entry check? Every deck sent to me says $50,000 minimum, accredited only, and one said $25,000 for repeat investors. Fathom, does yours say 506(b) or 506(c)? The 506(c) ones have made me get a verification letter from my CPA, which was an extra $350 I wasn't expecting.

hannah_west29 · Answer

Put real numbers on the fee schedule and the promote stops being the interesting part. Take a $30M purchase with $10M of equity. A 2% acquisition fee is $600,000 at closing. Asset management at 1.5% of equity is $150,000 a year, so $750,000 over five years. Add a 1% disposition fee on a $36M sale and that is another $360,000. Roughly $1.7M of certain money against a promote that may pay nothing. A lower acquisition fee traded for a bigger sponsor co-invest is the better deal for the LP every time, and it is fair to ask why 1.5% asset management is charged on equity rather than on revenue collected.

Why would a PPM say promote on one page and carried interest in the waterfall exhibit?

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