Who promotes off who?

[Anonymous]

I think I read in one of the finance journal articles (possibly the one you posted) that the LP should always prefer to have the promote dilute both the GP and LPs interest; as opposed to the GP just promoting off of the LPs pro rata portion of cashflow. I ran some numbers on this and found that the returns are the same in both cases. Is this correct? For example
Scenario 1:
LP (Pension Fund) = 90%
GP (Sponsor) = 10%

The sponsor promotes off all cash flows, thus diluting their 10% before receiving their promote

Scenario 2:
LP (Pension Fund) = 90%
GP (Sponsor) = 10%

The sponsor only promotes off of the Pension fund cash flows, thus receiving their 10% cash flow (undiluted) + promote

[Spencer Burton]

Sorry for the delayed response – both Michael and I have been traveling for the holiday weekend!

You are correct. You likely read this here:

https://www.pircher.com/media/publication/50_SACArticle.pdf

You are also correct that the actual distribution percentages are the same in both cases. But the LP generally prefers the promote to dilute both the GP and LP’s interest. This gives the LP the option to replace the GP, if necessary, and still dilute the prior GP’s share when paying the new GP’s promote.

[Anonymous]

Thanks Spencer!

[Author]

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