Ever come across the term “promote” in an alternative investment pitch and wonder what it actually means? Fred Hubler breaks down this key concept, common in deals structured with general partner (GP) and limited partner (LP) shares. A promote is the GP’s share of profits above a predetermined threshold, often also called carried interest.
He walks through how it’s calculated using a real estate example: limited partners first receive a preferred return tied to a specific internal rate of return, illustrated with a 9% preferred return in the source example, meaning investors get paid before the GP sees anything. Once that preferred return is satisfied, remaining profits are split between GP and LP, commonly in a 70/30 split, with 70% going to the LPs and 30% to the GP. Hubler notes that the combination of the preferred return and this profit split is collectively known as the “waterfall.”
In practice, this means: a promote only kicks in once investors have already been paid their preferred return, aligning the GP’s incentive with investor returns.
The complete explanation awaits on Forbes: What In The World Is A Promote?