Promote Vs Carried Interest Vs Catch Up
   
Can anyone explain the difference between carried interest, promote, and catch up, if there even is a difference?
[{"id": "fvtgztb", "text": "Carried interest and promote are the same thing. Promote is structured such that if you hit a return threshold (say 8% XIRR to all members) and get a return of and on your capital, the GP member would get say 20% of any money above that, and the other 80% would be split pari passu to the GP/LP. A catch up is language within the JV doc that relates to the promote that essentially says that once you get to the 8% return mentioned previously, the GP might get say 100% of the cash until they get their 20% promote, then the next tier proceeds pari. it\u2019s a way of getting some more money to the GP if the deal performs but isn\u2019t like a grand slam. I honestly haven\u2019t seen many catch up provisions, and the deals I\u2019ve seen them in it doesn\u2019t really matter - it seems like you either make it or you don\u2019t, but I guess that\u2019s the world of opportunity fund investing.", "replies": [{"id": "fvthauh", "text": "Just to simplify the explanation - a promote is where one partner receives a disproportionate share of the profits compared to its investment.", "replies": [], "depth": 2}, {"id": "fvti756", "text": "To clarify, would the structure below contain both promote (aka carried interest) and GP Catch-Up?\n\nFirst, to the LP Unreturned Capital - Sale\n\nSecond, to the LP 5.50% IRR - Sale\n\nThird, 80% to LP until 7.50% IRR Reached - Sale\n\nLP Split (80%) - Sale\n\nGP Split (20%) - Sale\n\nFourth, (70%) to LP and (30%) to GP - Sale\n\nLP Split (70%) - Sale\n\nGP Split (30%) - Sale", "replies": [{"id": "fvucfo9", "text": "No, it would be first to partners pro rata until a 5.5% irr, then 100% to gp so that the gp earns 20% of total dollars distributed, then 80/20 thereafter, something like that. Promote just means you get more % than you put in, a catch-up means you get an even larger split than the promote to get you to a certain threshold before the tiered promote kicks in. Hard to explain over text.", "replies": [], "depth": 3}, {"id": "fvuvdnd", "text": "To add to what the other guy said, it looks like there\u2019s a catch up above the first tier, but no promote just a split adjustment. Kind of nuanced but a promote is structured that x% goes to promote and then the rest of the cash is split pari passu, this structure just adjusts the cash flow splits which wouldn\u2019t be a promote. More or less the same thing but promote is technically an outsize portion paid to GP with pari paid from the non promote bucks\n\nAlso like the other guy said this is really tough to explain over text.", "replies": [{"id": "fvuyfly", "text": "Thank you for your help! I have provided two examples below of partnership structures. In the second example, of the total distribution (preferred return + GP Catch Up), 80% goes to the pref and 20% goes to the GP Catch Up. The Pref is paid first before GP Catch Up is paid out. The calculation I have utilized for the Catch-Up is to divide the pref balance by 80% and then multiply the result by 20%. Can you clarify or highlight which tiers below for each example would constitute the promote? If I am understanding correctly, there is no catch-up in the first example.\n\n&amp;#x200B;\n\nFIRST EXAMPLE:\n\nFirst, to the LP Unreturned Capital - Sale\n\nSecond, to the LP 5.50% IRR - Sale\n\nThird, 80% to LP until 7.50% IRR Reached - Sale\n\nLP Split (80%) - Sale\n\nGP Split (20%) - Sale\n\nFourth, (70%) to LP and (30%) to GP - Sale\n\nLP Split (70%) - Sale\n\nGP Split (30%) - Sale\n\n&amp;#x200B;\n\nSECOND EXAMPLE:\n\nFirst, to the LP Unreturned Capital - Sale\n\nSecond, to the LP Preferred Distributions 9.00% IRR - Sale\n\nThird, to the GP Catch-up Distributions - Sale\n\nFourth, 80% to LP until 7.50% IRR Reached - Sale\n\nLP Split (80%) - Sale\n\nGP Split (20%) - Sale\n\nFifth, (70%) to LP and (30%) to GP - Sale\n\nLP Split (70%) - Sale\n\nGP Split (30%) - Sale", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "fvtncuz", "text": "Looks like just a promote.", "replies": [{"id": "fvtnmm4", "text": "Thank you! Would it the GP split 20% and GP Split 30% BOTH be included in the total promote?", "replies": [{"id": "fweie7w", "text": "Yes, think of it this way. The amount of profit that goes to the developer goes up if the deal performs better (like a bonus). Since the developer/sponsor typically puts up some money, but not as much as the equity partner they only get to experience a bigger profit if the deal outperforms the return that the equity partner was promised if they invested.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "fvuqgr4", "text": "Carried\u00a0and promote interest are very similar, but catch up interest is different. Promote interest\u00a0is when a partner receives a bigger split or disproportionate amount of the equity compared to their investment. A\u00a0Catch Up clause\u00a0in a JV/LPA agreement gives a disproportionate share of the profit to the GP to catch them up to a certain level since the initial cashflows through the Preferred Return are usually 100% to the LPs.\u00a0Top Shelf Models has a great blog on this topic here: [https://tsmfinancialmodels.com/blog/general-partner-clawback](https://tsmfinancialmodels.com/blog/general-partner-clawback). Please let us know if we can answer any more questions for you!", "replies": [{"id": "fvuyjjx", "text": "Thank you! I appreciate the link. I sent a reply to a comment above to clarify the promote in two examples.", "replies": [], "depth": 2}], "depth": 1}, {"id": "fvv8lwd", "text": "Hey I coincidentally just posted an article today that covers a catch-up. See my site for Excel examples\n\n\nhttps://www.leveragedbreakdowns.com/2020/06/24/catch-up-waterfall-part-one-the-prompt/", "replies": [{"id": "fvwhj7o", "text": "Great article and website! I appreciate it.", "replies": [], "depth": 2}], "depth": 1}]