Promote
Also called Carried interest, Carry, Promoted interest.
The 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.
How it works
The promote is the reason a sponsor puts a deal together. A general partner contributing 10 percent of the equity might receive 20 percent of profits above the hurdle, and that extra 10 percentage points is the promoted interest. It is compensation for sourcing, structuring, financing and executing, paid only if the deal performs.
The economics are sensitive to structure in ways the headline number does not reveal. A 20 percent promote over an 8 percent compounded cumulative pref is a materially smaller entitlement than a 20 percent promote over an 8 percent simple non-cumulative pref, on identical deal performance. And a promote with a full catch-up produces a very different result from one without, because without a catch-up the general partner receives 20 percent of only the residual rather than 20 percent of all profit.
For a limited partner, the number that matters is the net return after promote, not the deal-level gross. For a general partner, the promote is also the source of the misalignment risk that clawbacks and multiple hurdles exist to manage: an IRR-only promote rewards speed, which can push a sponsor toward an early sale that a limited partner would not have chosen.
Worked example
Illustrative. $10,000,000 of limited partner capital, 8 percent compounded cumulative pref accruing to $4,693,281, total distributions of $18,000,000, so $8,000,000 of profit.
| With a full catch-up: GP promote20.0% of profit | $1,600,000 |
|---|---|
| Without a catch-up: profit after pref | $3,306,719 |
| Without a catch-up: GP promote at 20% of the residual8.3% of profit | $661,344 |
| Value of the catch-up clause to the general partner | $938,656 |
The same headline 20 percent promote, and the sponsor's actual entitlement differs by more than $900,000 depending on one clause. Neither structure is wrong. They are different deals.
The common mistake
Comparing sponsors on promote percentage
Two sponsors both offering an 8 percent pref and a 20 percent promote can deliver limited partner outcomes that differ by several hundred basis points of net IRR, driven by whether the pref compounds, whether it is cumulative, whether there is a catch-up, whether promote is calculated deal by deal or across the fund, and what fees sit above the waterfall. The comparable is the modelled net-to-limited-partner return under an identical set of property assumptions. Anything else is comparing labels.
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.
- 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.
- GP catch-upA 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.
- 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.
- Internal rate of returnThe internal rate of return is the discount rate at which the net present value of a deal's cash flows equals zero. It expresses a full investment, including the timing of every contribution and distribution, as a single annualised percentage.
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.