A co-GP partner pays for its seat with promote: the split inside the general partner decides who is actually paid for the work.
In two steps. First run the joint venture waterfall as usual, which gives the general partner its capital share plus the promote. Then split those two streams inside the GP: capital distributions pro rata to what each GP member funded, the promote by the negotiated share. In an illustrative venture where a co-GP funds 90 per cent of the GP commitment in exchange for half the promote, the base case pays the co-GP a 16.9 per cent IRR, while the sponsor, on 800,000 of capital, earns 40.2 per cent.
Worked in full in Real Estate Joint Ventures by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
A sponsor finds a 200,000,000 property and an institutional investor willing to fund 90 per cent of the equity, on condition that the general partner puts up the other 10 per cent. The sponsor cannot fund 8,000,000 on its own, so it brings in a co-GP: a family office or a GP-stakes fund that writes 7,200,000 of the GP cheque. The sponsor funds 800,000. The co-GP's price for doing so is a share of the promote. All terms are illustrative.
| Item | Value |
|---|---|
| Purchase price | 200,000,000 |
| Loan, interest only at 5.5% | 120,000,000 |
| Equity: investor 90% / GP 10% | 72,000,000 / 8,000,000 |
| Within the GP: co-GP / sponsor | 7,200,000 / 800,000 |
| NOI in year 1, growing 3.0% a year | 12,000,000 |
| Preferred return (investor IRR) | 8.0% |
| Promote above the pref | 20.0% |
| Co-GP share of the promote | 50% |
| Hold / exit cap rate on year-6 NOI / sale costs | 5 years / 6.00% / 1.5% |
NOI less 6,600,000 of interest gives distributions of 5,400,000 in year one, rising to 6,512,724 in year four. The property sells for 231,854,815; after sale costs and the loan, 108,376,993 comes back, so year five distributes 115,283,098. The waterfall pays 90/10 until the investor has its 8 per cent IRR, then splits the rest 72/8/20: 80 per cent shared pro rata, 20 per cent as promote to the GP.
Deal: 80,000,000 in, 13.0% IRR, 1.74x
Investor: 72,000,000 in, 12.1% IRR, 1.67x
GP capital distributions = 13,378,179; promote = 5,304,828
Up to here nothing is new. The investor does not care who sits inside the GP. The method is the one in a multi-tier IRR waterfall, with one promote tier.
The GP's two streams are divided on different keys. Capital distributions follow capital, 90/10. The promote follows the negotiated share, 50/50.
Co-GP = 90% × 13,378,179 + 50% × 5,304,828 = 14,692,776
Sponsor = 10% × 13,378,179 + 50% × 5,304,828 = 3,990,232
In Excel, by year: =GPcap*0.9+Promote*0.5, then =IRR() on each member's column
On 7,200,000 the co-GP gets back 14,692,776: a 16.9 per cent IRR and 2.04x. On 800,000 the sponsor gets back 3,990,232: 40.2 per cent and 4.99x. The sponsor's promote alone is 3.32 times the capital it invested.
Pro rata would hand the co-GP 90 per cent of the promote. The sponsor and co-GP would then both earn 20.2 per cent, the sponsor would be paid nothing for sourcing, financing and running the asset, and the arrangement would stop being a co-GP and become a second layer of investor. Against that pro rata benchmark, the 50/50 split moves 2,121,931 from the co-GP to the sponsor: 22.1 per cent of the profit the co-GP would otherwise earn. That is, in effect, a promote the co-GP pays the sponsor. For comparison, the investor gives up 9.0 per cent of its profit to the promote.
| Co-GP share of promote | Co-GP promote | Co-GP IRR / multiple | Sponsor IRR / multiple |
|---|---|---|---|
| 10% | 530,483 | 13.1% / 1.75x | 52.6% / 7.64x |
| 25% | 1,326,207 | 14.6% / 1.86x | 48.4% / 6.65x |
| 50% | 2,652,414 | 16.9% / 2.04x | 40.2% / 4.99x |
| 75% | 3,978,621 | 19.0% / 2.22x | 29.3% / 3.33x |
| 90% (pro rata) | 4,774,345 | 20.2% / 2.34x | 20.2% / 2.34x |
Even at 10 per cent of the promote the co-GP beats the investor's 12.1 per cent, because it gets the GP's pari passu capital return plus something. That is why co-GP money is easy to raise in a good market: a seat inside the GP is the investor's position plus a slice of the upside.
| Exit cap rate | Deal IRR | Promote | Investor IRR | Co-GP IRR | Sponsor IRR |
|---|---|---|---|---|---|
| 7.00% (weak) | 6.7% | 0 | 6.7% | 6.7% | 6.7% |
| 6.00% (base) | 13.0% | 5,304,828 | 12.1% | 16.9% | 40.2% |
| 5.50% (strong) | 16.4% | 9,457,137 | 14.9% | 22.3% | 53.2% |
In the weak case the promote is zero and every party earns 6.7 per cent. The co-GP's premium over the investor, 4.8 points in the base case, exists only above the pref.
A co-GP usually takes on things the investor never does: a share of the non-recourse carve-out guarantee, the obligation to fund its share of overruns and capital calls, sometimes the completion guarantee on a development. Those liabilities bite in the weak case, where the table shows the co-GP earning exactly what the investor earns. Price the seat across outcomes, and treat the promote share as payment for the guarantees as well as for the capital. A co-GP that signs a guarantee for 25 per cent of the promote is often selling an option cheaply. For the sponsor's side of the same question, see what IRR a sponsor earns on its co-invest.
Check the GP-level waterfall too. Some co-GP agreements give the co-GP its capital and a pref inside the GP before any promote is shared, which shifts more of a thin promote to the co-GP.
The book sets out the waterfall, the promote and who carries which obligation, and the free workbook for this case runs the promote as a live engine. The JV waterfall and promote model handles the first step on your own terms.
A co-GP is a capital partner that funds part of the sponsor's general partner commitment in a joint venture in exchange for a share of the promote. In the illustrative case here the investor requires the GP to fund 10 per cent of 80,000,000 of equity; the sponsor puts up only 800,000 and a co-GP the other 7,200,000, receiving half of the promote in return.
Rarely. Pro rata would give a co-GP funding 90 per cent of the GP 90 per cent of the promote, and the sponsor would earn exactly what the co-GP earns, 20.2 per cent in the base case, with nothing for sourcing and running the deal. The split is negotiated well below pro rata; at the 50 per cent tested here the sponsor earns 40.2 per cent.
Only when the promote pays. In the base case a co-GP with half the promote earns 16.9 per cent against the investor's 12.1 per cent. At a 7.00 per cent exit cap rate the promote is zero and both earn 6.7 per cent, while the co-GP may still carry guarantee and overrun funding obligations the investor does not.
This article is one calculation from Real Estate Joint Ventures. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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