GP catch-up
Also called Catch-up, Sponsor catch-up.
A general partner catch-up is a waterfall tier in which the general partner receives most or all of the distributions after the preferred return has been paid, until it has received its full promote percentage of all profit distributed so far. It restores the economic bargain the preferred return interrupted.
How it works
Without a catch-up, an 80/20 promote does not give the general partner 20 percent of profit. It gives 20 percent of whatever is left after the preferred return has been paid in full to the limited partners, which on a deal that only modestly clears its hurdle can be a small fraction of the intended amount. The catch-up tier fixes that by paying the general partner at an accelerated rate until the arithmetic is restored.
The rate is negotiable and is where most of the argument sits. A 100 percent catch-up sends every dollar to the general partner until it is caught up, which is fastest. A 50 percent catch-up splits the tier, so it takes more distributions to fill, about 2.7 times as many at a 20 percent promote, delaying and, on a deal that stops short, permanently reducing the promote. Both are common.
The full catch-up amount is a simple algebraic consequence of the promote share and the pref that was paid. For a 20 percent promote, a full catch-up equals 25 percent of the preferred return distributed, because at that point the general partner holds exactly one fifth of the total profit distributed. That relationship is a useful check on any waterfall model.
Formula
Full catch-up amount = preferred return paid x promote share / (1 - promote share)- At a 20 percent promote, the catch-up is 25 percent of the preferred return paid
- At a 30 percent promote, it is roughly 42.9 percent of the preferred return paid
- At a partial catch-up rate r, the tier needs preferred return paid x promote share / (r - promote share) of distributions, and the general partner receives r times that, so a partial rate raises both the distributions needed and the general partner's catch-up dollars
Worked example
Illustrative. Preferred return of $4,693,281 has been paid to the limited partners. Promote is 20 percent with a full 100 percent catch-up.
| Catch-up required25% of the pref paid | $1,173,320 |
|---|---|
| Total profit distributed after the catch-up | $5,866,601 |
| General partner share of that | 20.0% |
| At a 50% catch-up rate, distributions needed to fill the tierGP receives $1,564,427 | $3,128,854 |
| Full catch-up amount | $1,173,320 |
The full catch-up amount is fixed by the promote percentage. A partial rate changes both figures: at 50 percent the tier takes $3,128,854 of distributions to fill and the general partner receives $1,564,427 of it, because the limited partner's half of the tier is profit too and the general partner is owed 20 percent of that as well. At that point it holds exactly 20 percent of the $7,822,135 of profit paid. How much cash has to flow before the tier fills matters enormously on a deal that stops part way.
The common mistake
Modeling a catch-up on the wrong base
The catch-up is computed against profit distributions, meaning distributions above return of capital, not against total distributions including the returned capital. Running it against total distributions overstates the catch-up substantially, and on a deal where the limited partner capital is large relative to the profit it can hand the general partner more than its entire promote. The check is one line: after the catch-up tier is filled, the general partner should hold exactly the promote percentage of all profit distributed to date. If it does not, the base is wrong.
Related terms
- Distribution waterfallA distribution waterfall is the ordered set of tiers that determines how cash is split between limited and general partners. Each tier is filled completely before any money reaches the next one, and the general partner's share rises as it goes.
- PromoteThe promote is the general partner's share of profits in excess of its pro rata capital contribution, earned once the limited partners have received their capital back plus the preferred return. It is the performance compensation in a real estate partnership.
- Preferred returnA preferred return is a threshold rate of return that limited partners receive on their capital before the general partner participates in profits beyond its own pro rata share. It is a priority in the distribution queue, not a promise that the money will be there.
- Equity multipleThe equity multiple is total distributions divided by total equity contributed, expressed as a multiple. A 2.0x means an investor received two dollars back for every dollar put in, counting the original dollar.
- ClawbackA clawback requires a general partner to return promote it has already been paid when the final result shows it was not earned. It exists because deal-by-deal waterfalls pay promote on the winners before the losers are known.
Every figure, traced to its source
Altyst computes these in exact decimal arithmetic, not with a language model, and clicking any number shows the formula behind it.