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Adam M.
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What exactly is meant by "the promote"?

Adam M.
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Posted Feb 17 2024, 19:46

Howdy BP,

Was speaking with a fellow sponsor who operates all over Texas' primary markets.

There is a deal we were looking at collaborating on and he mentioned we could receive a portion of the "promote". I have done a fair bit of research/sniffing around but it seems this term varies market to market.

I took it to understand the equity split on the sponsor side let's say 80/20... the 20 being "the promote" for the sponsor? .. not sure if that's right? Any clarity anyone could kindly please provide on this term, would be much obliged! 

Many thanks in advance,

A

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Scott Mac
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Scott Mac
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Replied Feb 17 2024, 20:03

A wise way to do business is to have the person you do not know what they meant, tell You specifically what they meant.

Such as during the conversation saying something like, hey Bob I'm not exactly sure what you meant by XYZ, can you tell me more about that?

It is vitally important to have good clear communication with your business partners, investors, vendors, property managers, etc...

No one in here will know exactly what he meant.

The wise move would be to get on the phone with him and ask him that question directly, and if the answer is complicated write the answer down and repeat it to him ensuring that you understand it.

Good Luck!

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Adam M.
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Adam M.
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Replied Feb 17 2024, 20:18

@Scott Mac Hello Scott, thank you for your response here! 

Yes during our discussion I did in fact ask immediately and he mentioned it was regarding equity. However, walking away from our meeting I began to wonder more generally as when researching more about the term in my own time, it seems it can be quite flexible from what I understand. 

Beyond our personal business, I was curious to learn more about "the promote" in our industry's context so that I can better familiarize myself in the future. For example in this case it entailed equity but sponsor benefits can accommodate a myriad of things: for example, could sponsor fees be considered part of the promote?

This is what I was aiming to get from the forum but thank you again for your contribution-- have you had any experience yourself with the term? Would be curious to know! 

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Scott Mac
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Replied Feb 17 2024, 21:43
Quote from @Adam M.:

@Scott Mac Hello Scott, thank you for your response here! 

Yes during our discussion I did in fact ask immediately and he mentioned it was regarding equity. However, walking away from our meeting I began to wonder more generally as when researching more about the term in my own time, it seems it can be quite flexible from what I understand. 

Beyond our personal business, I was curious to learn more about "the promote" in our industry's context so that I can better familiarize myself in the future. For example in this case it entailed equity but sponsor benefits can accommodate a myriad of things: for example, could sponsor fees be considered part of the promote?

This is what I was aiming to get from the forum but thank you again for your contribution-- have you had any experience yourself with the term? Would be curious to know! 


 Just a non detailed catchall.

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Arn Cenedella
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Arn Cenedella
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Replied Feb 18 2024, 04:34

@Adam M.

First I would like to correct some incorrect information on this thread. 

Most of the compensation earned by General Partners is NOT at the start of the deal but rather at the END of the deal based on how well - how profitable the deal is. 

The acquisition fee paid at the start of the deal is generally 1% to 3% pending deal size. 

The GP share of the profit at the END of the deal also know as the PROMOTE is generally 20% to 30% of the profit (big picture high level). 

If a property is purchased at $4M and sold 5 years later at $6M, the profit (big picture high level for illustration purposes only) is $2M. 

The acquisition fee would be 2% of $4M or $80,0000. 

In a 75/25 split, GP share of the $2M “profit” would be $500,000. 

I believe $500,000 is larger than $80,000. 😀

Yes you are correct the promote is the GP share of the profit. if you were to partner with this operator, you don’t get ALL the promote as it is split among everyone in the GP team. 

So in the example above if you had 10% of the GP, your share often profit would be $50,000. 

Let me define (big picture high level) - numbers for illustration only they neglect closing costs of sale and pref payment paid investors during the hold).

Your share of the GP is calculated on what you do and what you bring in terms of capital. There are industry standards for this but that’s a post for another day. 


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Lucia Rushton
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Lucia Rushton
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Replied Feb 18 2024, 07:21

@Adam M. I think he is taking about the acquisition fee.

Let us know once you firm up with him.

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Jay Hinrichs#1 All Forums Contributor
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Jay Hinrichs#1 All Forums Contributor
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Replied Feb 18 2024, 07:37
Quote from @Arn Cenedella:

@Adam M.

First I would like to correct some incorrect information on this thread. 

Most of the compensation earned by General Partners is NOT at the start of the deal but rather at the END of the deal based on how well - how profitable the deal is. 

The acquisition fee paid at the start of the deal is generally 1% to 3% pending deal size. 

The GP share of the profit at the END of the deal also know as the PROMOTE is generally 20% to 30% of the profit (big picture high level). 

If a property is purchased at $4M and sold 5 years later at $6M, the profit (big picture high level for illustration purposes only) is $2M. 

The acquisition fee would be 2% of $4M or $80,0000. 

In a 75/25 split, GP share of the $2M “profit” would be $500,000. 

I believe $500,000 is larger than $80,000. 😀

Yes you are correct the promote is the GP share of the profit. if you were to partner with this operator, you don’t get ALL the promote as it is split among everyone in the GP team. 

So in the example above if you had 10% of the GP, your share often profit would be $50,000. 

Let me define (big picture high level) - numbers for illustration only they neglect closing costs of sale and pref payment paid investors during the hold).

Your share of the GP is calculated on what you do and what you bring in terms of capital. There are industry standards for this but that’s a post for another day. 



There are also laws about sharing or paying non licensed individuals money to bring in investors is that not correct ?

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Arn Cenedella
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Arn Cenedella
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Replied Feb 18 2024, 07:46

@Jay Hinrichs

Yes sir!

One needs to understand SEC regs around syndications and GP compensation.

One can’t simply bring investors and capital to the deal unless one has the proper securities or dealer license. 

One must do more. 

Some of these might be:

1. Put up some of the earnest money deposit and have your own capital at risk  

2. Participate in due diligence or operations.

We require our partners to do more than bring capital EMD (or capital at risk) and participation in DD are two of the most common - could be walking units - could be market research - secret shopping similar properties in the area - reviewing the UW etc etc

Yes be careful  Do it right.

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Replied Feb 18 2024, 07:53
Quote from @Arn Cenedella:

@Jay Hinrichs

Yes sir!

One needs to understand SEC regs around syndications and GP compensation.

One can’t simply bring investors and capital to the deal unless one has the proper securities or dealer license. 

One must do more. 

Some of these might be:

1. Put up some of the earnest money deposit and have your own capital at risk  

2. Participate in due diligence or operations.

We require our partners to do more than bring capital EMD (or capital at risk) and participation in DD are two of the most common - could be walking units - could be market research - secret shopping similar properties in the area - reviewing the UW etc etc

Yes be careful  Do it right.


I have raised millions for syndicators on BP that I personally met and liked their operations but just as a referral as I was pretty sure they could not comp me other than maybe buy me lunch sometime.   I have gotten part of the promote ( back end) as I provided EM like you mentioned. Although that was just a one off trying to help one of my normal fix and flip clients ( good borrower) go to the next level which he has done..
I suspect though payment under the table for investor capital is alive and well.. I know a guy out west who somehow does this basically as a living . And I wonder how some of the other guys that have monster followings and clubs how they do it I find it hard to fathom they just do as a social give back lots of work to suss out top flight syndicators and we are seeing this play out today as we see comments of deals going to foreclosure or back to bank deed in lu or pause distribution or cap calls..

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Chris Seveney
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Replied Feb 18 2024, 07:53
Quote from @Adam M.:

Howdy BP,

Was speaking with a fellow sponsor who operates all over Texas' primary markets.

There is a deal we were looking at collaborating on and he mentioned we could receive a portion of the "promote". I have done a fair bit of research/sniffing around but it seems this term varies market to market.

I took it to understand the equity split on the sponsor side let's say 80/20... the 20 being "the promote" for the sponsor? .. not sure if that's right? Any clarity anyone could kindly please provide on this term, would be much obliged! 

Many thanks in advance,

A


 What do you mean by "collaborating on? What is your role? If your role is to raise money for them, there are some posts in here that hint around warning you about sec regulations. You cannot raise money for another person with the goal based solely on profits or a commission. That is selling securities and you would need a license to do so. Even if you were an employee of the company a savvy SEC attorney will tell you that you need to be paid a salary and not commission based.

The promote point has been addressed so I will not add to that.

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Kevin S.
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Replied Feb 18 2024, 08:29
Quote from @Arn Cenedella:

@Adam M.

First I would like to correct some incorrect information on this thread. 

Most of the compensation earned by General Partners is NOT at the start of the deal but rather at the END of the deal based on how well - how profitable the deal is. 

The acquisition fee paid at the start of the deal is generally 1% to 3% pending deal size. 

The GP share of the profit at the END of the deal also know as the PROMOTE is generally 20% to 30% of the profit (big picture high level). 

If a property is purchased at $4M and sold 5 years later at $6M, the profit (big picture high level for illustration purposes only) is $2M. 

The acquisition fee would be 2% of $4M or $80,0000. 

In a 75/25 split, GP share of the $2M “profit” would be $500,000. 

I believe $500,000 is larger than $80,000. 😀

Yes you are correct the promote is the GP share of the profit. if you were to partner with this operator, you don’t get ALL the promote as it is split among everyone in the GP team. 

So in the example above if you had 10% of the GP, your share often profit would be $50,000. 

Let me define (big picture high level) - numbers for illustration only they neglect closing costs of sale and pref payment paid investors during the hold).

Your share of the GP is calculated on what you do and what you bring in terms of capital. There are industry standards for this but that’s a post for another day. 



 Hi Arn, in your example who gets the 75% (1.5M) of the 2M profit? I am just following this post and trying to learn.  Thanks.

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Arn Cenedella
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Arn Cenedella
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Replied Feb 18 2024, 08:59

@Kevin S.

Good question. 
I should have been more clear. 
The LPs get investors the passive investors get 75% of the profit. The General Partners the GPs the operators get 25% of the profit. It’s a reasonable arrangement as the LPs put up most of the cash and the GPs do all the work in addition to signing on the loan. The LPs get most of the profit. 

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Adam M.
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Adam M.
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Replied Feb 18 2024, 08:59
Quote from @Arn Cenedella:

@Adam M.

First I would like to correct some incorrect information on this thread. 

Most of the compensation earned by General Partners is NOT at the start of the deal but rather at the END of the deal based on how well - how profitable the deal is. 

The acquisition fee paid at the start of the deal is generally 1% to 3% pending deal size. 

The GP share of the profit at the END of the deal also know as the PROMOTE is generally 20% to 30% of the profit (big picture high level). 

If a property is purchased at $4M and sold 5 years later at $6M, the profit (big picture high level for illustration purposes only) is $2M. 

The acquisition fee would be 2% of $4M or $80,0000. 

In a 75/25 split, GP share of the $2M “profit” would be $500,000. 

I believe $500,000 is larger than $80,000. 😀

Yes you are correct the promote is the GP share of the profit. if you were to partner with this operator, you don’t get ALL the promote as it is split among everyone in the GP team. 

So in the example above if you had 10% of the GP, your share often profit would be $50,000. 

Let me define (big picture high level) - numbers for illustration only they neglect closing costs of sale and pref payment paid investors during the hold).

Your share of the GP is calculated on what you do and what you bring in terms of capital. There are industry standards for this but that’s a post for another day. 


@Arn Cenedella Thank you so much for the reply here Arn and for taking time to provide an example-- that completely makes sense!  I think I have gotten a grasp of what was inferred via your walkthrough 👍 

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Adam M.
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Adam M.
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Replied Feb 18 2024, 09:12
Quote from @Arn Cenedella:

@Jay Hinrichs

Yes sir!

One needs to understand SEC regs around syndications and GP compensation.

One can’t simply bring investors and capital to the deal unless one has the proper securities or dealer license. 

One must do more. 

Some of these might be:

1. Put up some of the earnest money deposit and have your own capital at risk  

2. Participate in due diligence or operations.

We require our partners to do more than bring capital EMD (or capital at risk) and participation in DD are two of the most common - could be walking units - could be market research - secret shopping similar properties in the area - reviewing the UW etc etc

Yes be careful  Do it right.


 Our role was hypothetically more operations focused but now I am curious on the raise-- is this different to a typical reg D offering when doing it for someone else rather than yourself? I have personally not had experience with bringing capital for others. 

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Arn Cenedella
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Arn Cenedella
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Replied Feb 18 2024, 09:17

@Adam M.

You are welcome. 
Just understand you get a portion of the promote not the entire promote. 
if you get 10% of the GP, you get 10% of 20% of the GP or 2% of the total promote do the entire GP.

To provide greater detail, there is often (general high level big picture for illustration purposes only), at least 2 LLCs in a syndication. 

The ownership LLC let's call it 123 Main St LLC and the GP entity let's call it 123 Main St GP LLC.

123 Main St GP LLC is typically named as manager of the 123 Main St LLC.

The Operating Agreement of the owner LLC will specify the terms of the promote etc paid the GP entity. This will specify the 80/20 split.

The Operating Agreement of the GP LLC will specify the split of the GP promote amongst the GP members. This will specify your share of the total GP compensation package.

Before the Karens potentially in this thread get self righteous I am not providing legal advice and @Adam M should retain proper legal counsel to prepare all documents associated with this syndication including compliance with SEC regs. 

My comments are meant to only educate and provide some useful info that will help all understand the process and guide them in the proper direction.  There are lots of ways to set up these deals. I mention the process I use at Spark Investment Group. 

Often some of these documents are provided at or near the escrow close and on occasion are not fully finalized (in the case of the GP entity docs) until after close. There is an element of trust involved working with other GP partners. 

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Adam M.
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Adam M.
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Replied Feb 18 2024, 09:18
Quote from @Chris Seveney:
Quote from @Adam M.:

Howdy BP,

Was speaking with a fellow sponsor who operates all over Texas' primary markets.

There is a deal we were looking at collaborating on and he mentioned we could receive a portion of the "promote". I have done a fair bit of research/sniffing around but it seems this term varies market to market.

I took it to understand the equity split on the sponsor side let's say 80/20... the 20 being "the promote" for the sponsor? .. not sure if that's right? Any clarity anyone could kindly please provide on this term, would be much obliged! 

Many thanks in advance,

A


 What do you mean by "collaborating on? What is your role? If your role is to raise money for them, there are some posts in here that hint around warning you about sec regulations. You cannot raise money for another person with the goal based solely on profits or a commission. That is selling securities and you would need a license to do so. Even if you were an employee of the company a savvy SEC attorney will tell you that you need to be paid a salary and not commission based.

The promote point has been addressed so I will not add to that.

 @Chris Seveney Thanks for the input-- yes our role was not focused around raising money but I am just trying to learn more about what you wrote: if let's say there are two GPs, one bringing capital to a deal for the other... is that not different to "selling a security" since they are both technically managers and have shares in the deal?  Just trying to educate myself as I have no experience with this scenario. 

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Adam M.
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Adam M.
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Replied Feb 18 2024, 09:24
Quote from @Arn Cenedella:

@Adam M.

You are welcome. 
Just understand you get a portion of the promote not the entire promote. 
if you get 10% of the GP, you get 10% of 20% of the GP or 2% of the total promote do the entire GP.

To provide greater detail, there is often (general high level big picture for illustration purposes only), at least 2 LLCs in a syndication. 

The ownership LLC let's call it 123 Main St LLC and the GP entity let's call it 123 Main St GP LLC.

123 Main St GP LLC is typically named as manager of the 123 Main St LLC.

The Operating Agreement of the owner LLC will specify the terms of the promote etc paid the GP entity. This will specify the 80/20 split.

The Operating Agreement of the GP LLC will specify the split of the GP promote amongst the GP members. This will specify your share of the total GP compensation package.

Before the Karens potentially in this thread get self righteous I am not providing legal advice and @Adam M should retain proper legal counsel to prepare all documents associated with this syndication including compliance with SEC regs. 

My comments are meant to only educate and provide some useful info that will help all understand the process and guide them in the proper direction.  There are lots of ways to set up these deals. I mention the process I use at Spark Investment Group. 

Often some of these documents are provided at or near the escrow close and on occasion are not fully finalized (in the case of the GP entity docs) until after close. There is an element of trust involved working with other GP partners. 

Wonderful. Also yes I would like to add here, on @Arn Cenedella 's note, we are simply discussing on this thread for educational purposes. This is not meant to solicit legal advice and our firm Wezt Capital works alongside SEC attorneys to ensure we are in full compliance at all times. 

These situations we are discussing are hypotheticals and are for thinking and discussion only!!!! Felt a need to shield myself from any prospective thread hijackers that want to castigate me for whatever reason !

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Replied Feb 18 2024, 09:32
Quote from @Arn Cenedella:

@Kevin S.

Good question. 
I should have been more clear. 
The LPs get investors the passive investors get 75% of the profit. The General Partners the GPs the operators get 25% of the profit. It’s a reasonable arrangement as the LPs put up most of the cash and the GPs do all the work in addition to signing on the loan. The LPs get most of the profit. 


 Thanks Arn

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Chris Seveney
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Replied Feb 19 2024, 04:49
Quote from @Adam M.:
Quote from @Chris Seveney:
Quote from @Adam M.:

Howdy BP,

Was speaking with a fellow sponsor who operates all over Texas' primary markets.

There is a deal we were looking at collaborating on and he mentioned we could receive a portion of the "promote". I have done a fair bit of research/sniffing around but it seems this term varies market to market.

I took it to understand the equity split on the sponsor side let's say 80/20... the 20 being "the promote" for the sponsor? .. not sure if that's right? Any clarity anyone could kindly please provide on this term, would be much obliged! 

Many thanks in advance,

A


 What do you mean by "collaborating on? What is your role? If your role is to raise money for them, there are some posts in here that hint around warning you about sec regulations. You cannot raise money for another person with the goal based solely on profits or a commission. That is selling securities and you would need a license to do so. Even if you were an employee of the company a savvy SEC attorney will tell you that you need to be paid a salary and not commission based.

The promote point has been addressed so I will not add to that.

 @Chris Seveney Thanks for the input-- yes our role was not focused around raising money but I am just trying to learn more about what you wrote: if let's say there are two GPs, one bringing capital to a deal for the other... is that not different to "selling a security" since they are both technically managers and have shares in the deal?  Just trying to educate myself as I have no experience with this scenario. 


 I believe you can have co-gp's in a deal, the PPM should be written in that manner where it outlines which GP is responsible for what. This would be something to run by the SEC attorney early on.

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Jay Hinrichs#1 All Forums Contributor
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Replied Feb 19 2024, 05:02
Quote from @Chris Seveney:
Quote from @Adam M.:
Quote from @Chris Seveney:
Quote from @Adam M.:

Howdy BP,

Was speaking with a fellow sponsor who operates all over Texas' primary markets.

There is a deal we were looking at collaborating on and he mentioned we could receive a portion of the "promote". I have done a fair bit of research/sniffing around but it seems this term varies market to market.

I took it to understand the equity split on the sponsor side let's say 80/20... the 20 being "the promote" for the sponsor? .. not sure if that's right? Any clarity anyone could kindly please provide on this term, would be much obliged! 

Many thanks in advance,

A


 What do you mean by "collaborating on? What is your role? If your role is to raise money for them, there are some posts in here that hint around warning you about sec regulations. You cannot raise money for another person with the goal based solely on profits or a commission. That is selling securities and you would need a license to do so. Even if you were an employee of the company a savvy SEC attorney will tell you that you need to be paid a salary and not commission based.

The promote point has been addressed so I will not add to that.

 @Chris Seveney Thanks for the input-- yes our role was not focused around raising money but I am just trying to learn more about what you wrote: if let's say there are two GPs, one bringing capital to a deal for the other... is that not different to "selling a security" since they are both technically managers and have shares in the deal?  Just trying to educate myself as I have no experience with this scenario. 


 I believe you can have co-gp's in a deal, the PPM should be written in that manner where it outlines which GP is responsible for what. This would be something to run by the SEC attorney early on.


Chris when I looked at this I beleive co Gp works as well as EMplyee.

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Robert Rixer
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Robert Rixer
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Replied Feb 19 2024, 08:52

I always knew promote to mean the split the GP receives at the end because they are being "promoted" to perform well and reach this level which means the previous performance hurdles (such as returning capital and pref) were achieved. Could be complete lore but it works for me.

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Dan Niazi
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Dan Niazi
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Replied Feb 19 2024, 13:02

The "promote" is a share in profits above and beyond the sponsor's proportional share of investment. This is often structured as a performance incentive. For example, in an 80/20 equity split, that 20% could legitimately be called the "promote." In other words, after all, investors have received their initial capital back and preferred return, the remainder of the profits is split, and 20% goes to the sponsor as a "promote."

However, one should note that the specific terms and structure of the promote can vary widely based on the deal, the market, and the agreement between the investors and the sponsors. It can be structured in any way by the promoter, from a simple split after certain return thresholds are made to a tiered structure that pays different splits at different levels of return or any number of other more complex arrangements.