Posted: July 4th, 2022
n this collaborative discussion, let’s consider the sponsor’s problem. Recall that in our example, the sponsor, or general partner, contributed 5%, or $775,000, of the required equity capital for the investment. The general partner received an overall cash flow of $6,305,000 in the 10th year, in addition to small amounts of cash flow in years 1 through 9. This is an excellent return. So, where is the problem?
What does the general partner do with that money? The general partner earned such a strong return because of the waterfall structure. The general partner sponsored the investment, investing only a small percentage of the required equity capital. By agreeing to open the investment to other money partners and agreeing to get paid last, the equity partner is entitled to significant returns on the small equity investment.
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