Are GPs investments in their own deals treated like LPs investments?

searcher profile

August 23, 2024

by a searcher in Montreal, QC, Canada

Quick question:

When using the independent sponsor model, or any model where LP's are contributing most of the capital, I'm trying to understand how the GP's invested capital is treated.

Example:

- If you raise $1M of equity for a deal, $900K from LPs (90%), and $100K from the GP (10%)
- You offer a preferred return to LPs of 10%
- At exit, you repay LPs their Principal + Preferred first, before any catch up or carry

Will the $100K invested by the GP be entitled to receive that preferred return as well?

In other words, when the GP invests in his own transaction (to show conviction and have skin in the game) is his investment treated like an LP investment?

Follow up to that: is the GP entitled to receive his initital invested capital at the same time as LPs, or will he receive it after they've been paid?

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commentor profile
Reply by a professional
from Dartmouth College in Los Angeles, CA, USA
Yes, the GP investment is typically entitled to the same preferred class of interest (with pro rata return of capital plus the preference). In the independent sponsor model, this co-invest often is rolled over from a transaction closing fee (so no actual money put in), though this has to be thought through on the front end from a tax perspective). The GP's carry is what is junior to the preferred return of the LP's (though the management fee is not).
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Reply by a searcher
in Reno, NV, USA
Typically yes, but not necessarily. It always comes down to whatever the market will bear. Pari passu is language LP's attorney's will want to see in the subscription agreement, but it is not a requirement. A lot of this decision depends on what you are bringing to the table as GP in addition to cash. DM me if you want to discuss.
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