Promoted equity (carried interest) is a share of the profits of an investment or investment fund that is paid to the investment manager as compensation. It is given in exchange for creating value or bearing a disproportionate share of downside risk.
By way of a simple example, assume a limited partnership is formed to acquire a $5,000,000 industrial property and is capitalized with a $3,500,000 mortgage and the $1,500,000 balance from equity. The partnership may be structured such that the limited partners contribute 90% of the equity or $1,350,000 and the general partner or sponsor contributes the remaining 10% or $150,000. Terms of the partnership may call for the limited partners to receive an 8.0% preferred return, followed by a 70/30 split of all cash flow in favor of the limited partners. If the property produces cash flow of $180,000, resulting in a cash-on-cash return of 12.0%, the cash flow distribution may be calculated as follows: $108,000 to the limited partners which is equal to an 8.0% return on their investment of $1,350,000. The remaining $72,000 of cash flow would be distributed 70% to the limited partners ($50,400) and 30% to the general partner ($21,600). In aggregate, the limited partners have received $158,400 which equates to an 11.7% cash-on-cash return for the limited partners while the general partner receives $21,600 which equates to a 16.0% cash-on-cash return on their investment of $150,000. In this case, the general partner has received 12.0% of the cash flow despite investing only 10% of the equity. However, the general partner did not receive any cash flow until after the limited partner had received a preferred return. Note that this is a simplified example and that such “waterfall” distribution structures can take many forms and involve complex models and operating agreements.
Realized1031.com is a website operated by Realized Technologies, LLC, a wholly owned subsidiary of Realized Holdings, Inc. (“Realized”). Equity securities offered on this website are offered exclusively through Thornhill Securities, Inc., a registered broker/dealer and member of FINRA/SIPC("Thornhill"). Investment advisory services are offered through Thornhill Securities, Inc. a registered investment adviser. Realized Holdings, Inc. has a minority ownership interest in Thornhill Securities, Inc. Check the background of this firm on FINRA's BrokerCheck.
Hypothetical example(s) are for illustrative purposes only and are not intended to represent the past or future performance of any specific investment.
Investing in alternative assets involves higher risks than traditional investments and is suitable only for sophisticated investors. Alternative investments are often sold by prospectus that discloses all risks, fees, and expenses. They are not tax efficient and an investor should consult with his/her tax advisor prior to investing. Alternative investments have higher fees than traditional investments and they may also be highly leveraged and engage in speculative investment techniques, which can magnify the potential for investment loss or gain and should not be deemed a complete investment program. The value of the investment may fall as well as rise and investors may get back less than they invested.
This site is published for residents of the United States who are accredited investors only. Registered Representatives and Investment Advisor Representatives may only conduct business with residents of the states and jurisdictions in which they are properly registered. Therefore, a response to a request for information may be delayed until appropriate registration is obtained or exemption from registration is determined. Not all of services referenced on this site are available in every state and through every representative listed. For additional information, please contact 877-797-1031 or firstname.lastname@example.org.