A capital call is a request made by the GP to the LPs for a portion of the committed funds to be paid into the partnership. Capital calls are typically made to cover investment acquisitions, operational expenses, or additional capital requirements for the project. They are governed by the terms set out in the partnership agreement, which detail the timing, amount, and conditions under which capital calls can be made. Failure of an LP to meet a capital call can lead to penalties, dilution of interest, or forfeiture of their investment position.
A clawback provision is a contractual clause included in the GP LP structure that entitles LPs to reclaim part of the GP’s previously distributed carried interest. This scenario occurs if future losses mean that the GP has received more in distributions than the agreed-upon share. The clawback is designed to ensure that over the life of the investment, the GP receives only the portion of profits that aligns with the agreed performance thresholds and profit-sharing ratio after all investments have been liquidated and final distributions made.
The hurdle rate, often synonymous with the preferred return in a real estate investment context, is the minimum annualized rate of return that the LPs are entitled to receive before the GP can participate in the profits. This rate acts as a performance threshold that the investment must exceed for the GP to begin receiving a share of the profits (carried interest). The hurdle rate is crucial for aligning the GP’s incentive with the LPs’ expectations, ensuring that the GP is motivated to exceed this minimum performance benchmark.
Waterfall Structure Tiers
The waterfall structure tiers represent the sequential order in which profits are distributed among the GP and LPs according to predefined benchmarks within the distribution waterfall. Each tier corresponds to achieving specific financial milestones, such as the return of capital, payment of the preferred return, and various levels of profit-sharing between the GP and LPs based on the investment’s performance. The tiers are designed to ensure that financial rewards are distributed in a manner that reflects the level of risk undertaken and the value created by each party. Advanced structures may include multiple tiers to more finely tune the distribution of returns based on surpassing certain internal rates of return (IRRs) or other performance metrics.