Parties Involved in Private Equity Real Estate Deals.
Real estate private equity transactions typically involve two types of stakeholders on the equity side.
Sponsors and Investors
Sponsors are people who find deals, manage the assets of a deal or fund, and attract investors. They are the ones who manage the business and make the day-to-day decisions about how assets and funds operate. Sponsors are often called General Partners (GPs) and can be either individuals or companies. GPs typically donate a small percentage of their shares but do most of the work related to running the business or the fund.
Investors are people who invest a majority of their equity in the business but do little or no work related to the business or the operation of the fund. These may be individuals, family offices, pension funds, or other institutional investors. Investors are often referred to as Limited Partners (LPs) because their liability is limited to the investment, but they also have limited operational interest.
Preferred Return
The primary characteristics of the Private Equity Waterfall, which guarantees limited partner priority, are the initial return on invested capital and the return on capital. This is called a preferred return (often simply "Pref") because it is the first cash flow paid out to the equity partner.
As a primary source of equity, Limited Partners naturally expect to recoup their initial investment along with a nominal interest rate. This ensures that Limited Partners are adequately insured for their risks as majority equity investors in the project.
The preferred rate of return can be calculated using simple interest, compound interest, equity multiples, or internal rate of return (IRR). The interest rate and calculation method used to calculate the senior yield can have a significant impact on other asset classes. With so many possibilities, care should be taken to use a flexible, easy-to-use, and reliable waterfall modeling tool on the front end.
Understanding and modeling the different impacts of these options is often the most difficult and time-consuming aspect of structuring and negotiating. waterfalls. Discussions with potential investors often involve a lot of back and forth, so it's a good idea to share the different variants so that everyone involved gets the structure right.