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The history of distribution payments to investors dates back to the early days of securities markets in the 19th century. During this time, dividend payments were typically made by issuing paper checks that were sent by mail to shareholders. The process was slow, expensive, and cumbersome.
Over time, the process of distributing payments to investors has evolved significantly, largely driven by advances in technology. In the 1970s, electronic funds transfer (EFT) became available, which enabled payments to be made more quickly and securely. However, it wasn’t until the 1990s that ACH (Automated Clearing House) payments became widely used for distributing funds to investors.
Today, ACH payments have become the standard for distributing payments to investors because they are faster, more efficient, and more secure than traditional paper checks. ACH payments can be initiated and processed electronically, which eliminates the need for physical checks to be printed, signed, and mailed. This not only speeds up the payment process but also reduces costs and errors.
Moreover, the rise of online investment platforms has made it easier than ever to distribute payments to investors. Many platforms now offer integrated payment solutions that enable investors to receive their distributions directly into their bank accounts without ever leaving the platform. This has made the process even more streamlined and convenient for investors.
With Covercy, GPs can streamline the complex process of managing distribution payments to investors, saving time, reducing errors, and providing investors with greater transparency and insight into the performance of their investments. Covercy can help manage even the most complex waterfall distribution payments to investors in several ways. Here are a few examples:
Automating Calculations:With Covercy, you can automate the complex calculations involved in determining the distribution of profits or returns to investors based on the specific terms of the investment agreement. This can help reduce errors and save time compared to manual calculations.
Tracking Distributions:Covercy can track the distributions made to investors and maintain a record of each payment made, ensuring that each investor receives their fair share of the profits in accordance with the terms of the investment agreement. Because Covercy integrates with third-party banking partners, GPs and LPs can transfer money instantly. No need for wires, paper checks, NACHA files, or other delayed and manual payment methods.
Reporting: Covercy can generate customized reports that provide detailed information about the distribution of profits or returns to investors, including the amount and timing of each payment made. This information can be used to provide investors with transparency and insight into the performance of their property investments.
Investor Communications: Covercy can also manage investor communications related to the distribution of profits or returns, including sending out notifications to investors when distributions are made, providing performance reports, and handling investor inquiries.
Distribution Payments in Real Estate
The nuances of making distribution payments to real estate investors can vary considerably compared to other types of investments, such as private equity or funds. Here are some key points of consideration:
Type of Investment: In real estate, the form of investment can range from rental properties, commercial properties, real estate investment trusts (REITs), etc. Private equity involves investments in private companies, while funds might include mutual funds, hedge funds, or exchange-traded funds (ETFs). The mode of distribution payments would vary based on the type of investment.
Frequency of Payments: Real estate investments, particularly rental properties, can provide consistent cash flow in the form of monthly rent payments, which can then be distributed to investors. On the other hand, private equity and fund investments usually distribute returns after a longer period, often after a successful exit event such as a sale or IPO.
Profit Distribution: Real estate profits are typically distributed as a percentage of rental income or property sales. In contrast, private equity or fund distributions can involve complex calculations involving carried interest, management fees, hurdle rates, and high watermark provisions.
Taxation: The tax treatment of distribution payments can vary widely. Real estate investors may have access to tax benefits such as depreciation or 1031 exchanges, whereas private equity investors may be subject to capital gains tax on their returns. The tax implications of funds vary based on the structure of the fund and the type of income it generates.
Liquidity: Real estate is generally less liquid than private equity or fund investments, which may affect the timing and size of distribution payments. While real estate often involves longer holding periods, private equity or fund investments may allow for more flexibility in terms of when and how returns are distributed.
Risk Profile: Real estate is generally seen as less risky compared to private equity or certain funds, but the risk profile of the investment will impact the expected return and consequently the distribution payments to investors.
Standard Pro Rata: A standard pro rata model is a different way to distribute profits or returns from a real estate investment compared to a distribution waterfall. In a pro rata model, each investor receives a proportionate share of the profits or returns based on their ownership percentage in the asset. For example, if an investor owns 10% of the investment, they would receive 10% of the profits or returns.
Distribution Waterfall: In contrast, a distribution waterfall typically involves a more complex structure with multiple tiers determining the distribution of profits or returns among different stakeholders. The waterfall may include a preferred return, a promote or carried interest, and other tiers that are triggered by specific events or milestones.
Main Differences: The main difference between the two models is the level of complexity and the way that profits or returns are allocated. A pro rata model is simpler and more straightforward, as each investor’s share of the profits is based solely on their ownership percentage. On the other hand, a distribution waterfall is more complex. It may involve a more nuanced distribution of profits based on specific terms and conditions set out in the investment agreement.
CRE Syndication: In commercial real estate syndication, a distribution waterfall is often preferred over a pro rata model because it allows for a more flexible and tailored distribution of profits that can take into account the different roles and contributions of the various stakeholders in the investment.
What Covercy customers are saying
“We started with a pilot to automate distributions and central investor management on Covercy. We’ve grown our AUM by XX% in 18 months. We’re never going back.”
Eric Benitez Principal, FCA Orbita Group
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Covercy is the first real estate syndication platform where banking meets investment management. Save time with our automated distribution & capital call payment processing, gain your LPs’ trust with our intuitive Investor Portal, and generate interest from capital funds held in your Covercy Wallet – all in one platform.
Covercy is not a bank. Banking provided by Choice Financial Group; Member FDIC. Deposits are insured up to at least $250,000 per depositor, per FDIC-insured bank, per ownership category. The APYs presented here are indicative as of July 26, 2023 and fluctuate as the interest rate changes
The Currency Cloud Limited (Non MIFID related products). Registered in England No. 06323311. Registered Office: Stewardship Building 1st Floor, 12 Steward Street London E1 6FQ. The Currency Cloud Limited is authorized by the Financial Conduct Authority under the Electronic Money Regulations 2011 for the issuing of electronic money (FRN: 900199)
Covercy Europe Limited. Registered in England No. 675000. Registered Office: 5 Elstree Gate, Elstree Way, Borehamwood, Hertforshire, WD6 1JD, UK
Covercy Technological Trading Limited. Registered in Israel No. 57797. Registered Office: 3 Ha-Yetsira St, Ramat Gan 5252141.
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