No. On a multi-let industrial and office estate held for ten years the promote rises with gearing to a peak of 2,993,873 at 65 per cent loan to value, then falls by 117,744 to 2,876,129 at 70 per cent, while the equity return over that same stretch rises from 9.3725 to 9.8268 per cent. Above 65 per cent the manager already takes a full fifth of the equity profit, so the only thing left to move is the pool: 14,969,395, then 14,380,804.
The whole ladder, not the chosen level
Bracken Wharf was underwritten at 55 per cent gearing. The loan is 14,520,000, which is 55 per cent of the 26,400,000 price and not of the 28,195,200 the estate cost to buy. It is fixed at 4.35 per cent, interest only, repaid at exit, and it carries a 1.10 per cent arrangement fee. The model that produced that one case can produce every other gearing in an afternoon, and a paper that shows one gearing is withholding the shape of the curve it sits on.
Bracken Wharf at seven gearings, ten-year hold, exit yield unchanged.
Loan to value, per cent
Equity at completion
Equity return, per cent
Multiple
Promote
Cover in year four
0
28,195,200
6.8205
1.8024
0
—
20
22,973,280
7.2653
1.8822
0
8.24
35
19,056,840
7.7299
1.9709
0
4.71
45
16,445,880
8.1378
2.0534
415,486
3.66
55
13,834,920
8.6647
2.1671
1,748,716
3.00
65
11,223,960
9.3725
2.3337
2,993,873
2.54
70
9,918,480
9.8268
2.4499
2,876,129
2.35
The equity column reproduces from the loan terms alone. At 70 per cent the loan is 26,400,000 multiplied by 0.70, or 18,480,000; the arrangement fee at 1.10 per cent is 203,280, so 18,276,720 arrives; and 28,195,200 less 18,276,720 is 9,918,480. The same subtraction reproduces every other row. The return column is monotone. The promote column is not.
Why the promote peaks and the return does not
A promote is a share of pounds and a return is a percentage. The multiple less one, multiplied by the equity at completion, gives the equity profit, and that pool shrinks as the loan grows.
Equity profit derived from the printed multiple, and the share of it the manager takes.
Loan to value, per cent
Equity
Multiple less one
Equity profit, derived
Promote
Promote over profit, per cent
45
16,445,880
1.0534
17,324,090
415,486
2.3983
55
13,834,920
1.1671
16,146,735
1,748,716
10.8302
65
11,223,960
1.3337
14,969,395
2,993,873
20.0000
70
9,918,480
1.4499
14,380,804
2,876,129
19.9998
Read the last two columns together. At 65 and 70 per cent the promote lands on a fifth of the equity profit, 20.0000 per cent and 19.9998, which is the catch-up finishing: the manager has been paid up to a full twenty per cent share and the eighty twenty tier does the rest. At 55 per cent the ratio is only 10.8302 per cent, and at 45 per cent 2.3983, because there the catch-up runs out of money before it finishes and the manager keeps what it had reached. Once the fifth is being taken in full, the only thing left to move is the pool it is a fifth of: 14,969,395, then 14,380,804.
Below 45 per cent the promote disappears for the opposite reason. There is plenty of profit, 22,623,828 of it at zero gearing on the same derivation, but the equity return is 6.8205 per cent at zero gearing and 7.7299 at 35, both under the 8 per cent preferred return, so none of it reaches the promote at all.
More debt always raises the percentage and always shrinks the pounds. Equity profit at zero gearing is 22,623,828 and at 70 per cent it is 14,380,804, so an investor who gears to the top of the ladder earns 9.8268 per cent instead of 6.8205 and takes home 8,243,024 less in absolute terms, before the promote is deducted. That is not an argument against gearing, because the investor who commits 9,918,480 rather than 28,195,200 has 18,276,720 to commit somewhere else. It is an argument for putting the pounds column next to the percentage column.
Two warnings the ladder carries
The derived profit column is arithmetic on a multiple printed to four decimal places, so it is approximate. The 55 per cent row is the test of it: the derivation gives 16,146,735 against the 16,146,807 the model reports for that case, a difference of 72 caused by the rounding of 2.1671. The shape of the column is not in doubt.
The second warning is a waterfall convention, and it is where published promote figures most often go wrong. At 35 per cent the equity return before the split is 7.7299 per cent, below the preferred return, and the promote is correctly nothing. A waterfall that credited only the money subscribed at completion, ignoring the 1,108,947 called in year one, would manufacture a six-figure promote at that gearing all the same: a performance fee on a deal that never cleared its hurdle, computed on capital the investor had not been given back.
What to ask about a capital structure
Ask for the whole ladder and not the chosen level. On this estate the curve is monotone in return and single-peaked in promote, and those two facts point in different directions.
Ask what the promote does at each level. The manager's 1,748,716 at the chosen 55 per cent is not the maximum available across the ladder: gearing to 65 per cent would have raised it by 1,245,157 to 2,993,873.
Ask what happens on the way down. Interest cover in year four is 2.35 at 70 per cent, against 3.00 at 55 and 8.24 at 20, and it is measured on a year with no capital expenditure.
Ask about year one. At every gearing on the ladder the estate produces a net income of minus 265,863, so the first year's interest is paid out of subscribed equity and not out of rent.
The ladder that makes the return look best is the same ladder that makes the first year hardest to fund, and it is the first year that usually breaks a deal. Whoever recommends a gearing is also recommending their own performance fee, and the two recommendations are almost never shown on the same slide.
The workbooks behind this article
Every figure above is a live formula in the free companion files for
Commercial Real Estate Investing. Each workbook ends with a Checks sheet
setting the printed figure beside the computed one. No account and no email address.
At what wealth does a family office pay?A five-person office costs the same $2,442,000 at $100m as at $2bn. Against a tiered multi-family schedule the two curves cross exactly once.
Does an undrawn revolver count as liquidity?67.4567 per cent of the headroom, and it leaves at a fall in annual revenue of 8.4127 per cent — not the 13.3333 per cent the board deck implies.
Does supply chain finance count as debt?66,049,315 released, and leverage of 2.7622× or 3.1362× depending on which balance the test is asked of — the second is a breach at today's EBITDA.
Does the fulcrum move with enterprise value?A worked capital structure at three enterprise values. The break migrates from the first lien to the subordinated notes without a single document changing.
How many companies does a reserve pool defend?Holding pro rata to the Series D costs $14.76m per company. A $40m reserve defends 2.71 of forty — and 61 per cent of the cost is the last round.
How much room a 1.15x downside actually leaves79 basis points of margin. The leverage covenant fails first, five basis points before the coverage covenant the chapter reports on, and 4.6 per cent of EBITDA is the whole cushion.
How the GP catch-up is actually solvedMost write-ups state the catch-up formula then hardcode the answer. Set it as a solve and it moves on its own when the carry rate does.
How do you set a minimum cash balance?Three components, 124,596,281 in total — and the double count that turns a margin of 27,403,719 into an apparent shortfall of -3,988,281.
Is a 2/10 net 60 discount worth taking?An annualised 14.8980 per cent against a revolver at 4.50 per cent — worth 5,471,890 a year, and 0.3132 turns of reported leverage.
Should corporate debt be fixed or floating?78.1818 per cent of gross debt fixed, and a net floating exposure after cash of -608,000.00 — the proportion, not the instrument.
Six ways to state the same fund's return7.12 per cent, 18.04 per cent, or 1.323 times the public market — one fund, one set of flows. The eleven-point gap is the valuation, and it is not cash.
The IRR at which a closed-ended fund merely tiesA drawdown fund advertising 13.25 per cent ties an evergreen netting 8.64. On committed rather than called capital, 78.7 per cent of the edge vanishes.
The month a remediation trigger has to be armed byMonth 8, on a one-year window and a 14-week hiring lead time. The date is 12W − L/4.33 and holds for any portfolio size — the book only changes the euros.
Two routes to the same NAVFive findings in one quarter-end close, and not one of them was a modelling error. Every one was a control that did not exist.
What a CBAM certificate buffer costs to holdCarry and protection are both linear in the buffer, so the break-even probability is identical at 5 per cent and at 30 — and 2027 costs exactly twice 2026.
What a clawback actually collateralises24 million recovers 13.20 net of tax and 7.20 is escrowed. The rule is e ≥ 1 − t, and every euro won on the tax clause lands uncollateralised.
What a co-investment programme actually saves37 basis points, and a 22.8 per cent total-loss rate erases it. At the usual per-deal cap a single failure is 37 per cent of the annual cohort.
What a diligence exercise actually recoversEighteen basis points is only the part that reaches the yield. Three of the four instruments never do, and the exercise is worth thirty-one.
What a follow-on reserve is actually worth0.019 turns under plain dilution, 0.285 under pay-to-play. The optimum is a property of the shareholders’ agreement, not of the portfolio.
What a lease mark-to-market is actually worth5,788,000 becomes 807,365 once the over-market stream, the expiry dates and the cost of re-letting are priced — and nothing at all below a 43.7 per cent renewal rate.
What a minimum payment actually does£81.53 leaves the account and £20.46 reaches the debt. On minimums alone the set clears in 258 months and repays 1.78 times what was borrowed.
What a month of delay costs in an enforcement463,000 euros of present value a month. No single error about enforcement, and no pair of errors, moves the indifference point from 58.7 cents to the 72 on the table.
What a pro rata cheque actually costsDefending costs 1.25 times the initial cheque across two rounds, not more in each — and below a 521 exit the follow-on dollars come back worth less than they cost.
What a subscription line does to the IRR20 per cent becomes 38.41 on the same asset while the multiple falls. Two dollars of interest buys 18.4 points, and the longer the line runs the cheaper each point gets.
What one point of fees actually costsOne point on the annual charge turns 738,846 into 567,961 over forty years — 23 per cent of the pot, and 2.43 of wealth lost per 1 of fee.
When the promote stops clearingCarried interest is not proportional to performance near the hurdle. It is a step function, and $2m of headroom is what stands between a promote and none.
Why a secondaries bid-ask gap has no zoneThe seller’s floor and the buyer’s ceiling are one formula at two rates. At equal required returns the zone is exactly zero — here it is 11.02 points apart.
Why refining a due diligence rubric makes it weakerThree of twelve managers carry a terminal flaw and the average approves all three. Splitting eight domains into sixteen makes it easier to hide, not harder.