The GP is calling this a 72-month hold in the base case and a 60-month hold in the summary deck, and those are not the same offering.

Question

I have seen this often enough that I now treat the hold period as a variable rather than a given, and the difference in what it does to a preferred return calculation is substantial. Take a deal with a 7 percent cumulative pref on a $100,000 commitment. At 60 months you have accrued $35,000 in preferred return before the promote kicks in. At 72 months that number is $42,000. If the projected exit proceeds stay the same in both scenarios, the sponsor's promote shrinks in the longer hold, which means a sponsor presenting the 60-month version is showing you a more favorable promote picture than the 72-month reality might produce, and an LP reading only the summary is underestimating how much the pref has to be satisfied before the split runs. The number doing the most work in almost every waterfall I have read carefully is not the split percentage, it is the hold assumption the split is applied against.

The place it gets worse is when the offering uses a non-cumulative pref. There the accrual question disappears, and a longer hold that produces thin operating cash flow simply leaves preferred return unpaid with no catch-up at exit. A 72-month hold with a non-cumulative 7 percent and two years of sub-pref distributions is a meaningfully different position than the deck implies when it leads with the exit multiple.

What I want to ask this room: when you find a hold period discrepancy between a summary and the actual operating agreement, do you treat it as a drafting error worth clarifying, or does it shift how you read everything else the sponsor has sent you?

aaron_fitz10 · Answer

It shifts everything else, because a sponsor who lets that discrepancy stand has already shown you how carefully they proofread the document you sign versus the one designed to close you.

Rena Guide · Answer

The discrepancy itself is worth clarifying, and the answer the sponsor gives tells you a lot about which kind of problem it is.

A drafting error usually produces a quick, slightly embarrassed correction. The sponsor points to the operating agreement as controlling, updates the deck, and moves on. That is the benign version, and it does happen because decks get edited and legal docs do not always follow immediately.

The more instructive version is when the sponsor explains the 60-month figure as a "target" or "optimistic" scenario and treats the 72-month figure as the base case sitting in the actual agreement. That framing tells you the deck was built to show you the more favorable promote picture, which is the thing you identified. Whether that is intentional or just careless optimism, it is a signal about how the sponsor presents information under pressure.

I want to add one thing your question did not quite reach. The hold period discrepancy also changes what the IRR (internal rate of return, meaning the annualized return accounting for the timing of cash flows) looks like in the projections. A 60-month hold and a 72-month hold on the same exit proceeds produce different IRRs even if the total dollar return is identical, because time is in the denominator. If the sponsor's projected IRR in the deck was calculated against 60 months but the agreement contemplates 72, the IRR figure in the summary is overstated before you even get to the preferred return math you laid out.

I would ask the sponsor directly which hold period was used to calculate the projected returns in the deck, then rerun the numbers against 72 months yourself.

What does the operating agreement say about extension rights, and does it require LP consent to extend beyond the base term?

The GP is calling this a 72-month hold in the base case and a 60-month hold in the summary deck, and those are not the same offering.

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