Who's who: the GP and the LPs
The sponsor—the general partner, GP—finds the deal, signs the loans, and runs the business plan. Investors—limited partners, LPs—put in most of the capital and take no operational role. The whole structure question is how the deal pays the GP for the work without letting the GP win while LPs lose.
Alignment signals to look for: the GP investing meaningfully alongside LPs, fees that cover operations rather than generate profit, and a promote the GP only earns after investors are paid a hurdle.
The fees
The management fee—commonly 1–2% a year—pays the sponsor to operate the deal. Some deals add acquisition, financing, or disposition fees. Fees aren't inherently bad; unexplained fees are. The test is whether the sponsor's real payday comes from fees regardless of outcome, or from the promote after investors win.
Management fee
Annual fee for running the deal, usually a percent of invested equity or assets. Compensation for work—not a return on the GP's capital.
Profit split
How profits divide between LPs and GP after the hurdle—'70/30' means investors take 70%. The GP's share is the promote: pay for performance.
The waterfall—the order money comes back
Distributions follow a strict sequence called the waterfall. (Remember module 01's capital stack: the bank sits ahead of all of this—the waterfall only divides what's left after the loan is serviced.) First, return of capital: investors get their original investment back. Second, the preferred return: investors earn their hurdle—say 8% a year—before the sponsor shares in any profit. Third, in many deals, a GP catch-up: the sponsor receives a larger share until the overall split reaches the target ratio. Fourth, the split: everything else divides at the stated ratio, like 70/30.
Read a waterfall the way you'd read a contract, because it is one. The stats on the page—preferred return, GP catch-up, profit split—are the waterfall's parameters, and they must agree with each other. A deal advertising an 8% pref whose fine print splits profits from dollar one has a story that doesn't add up.
Run the waterfall yourself
Move the sliders and watch each tier fill. This is the fastest way to build intuition for what a pref actually protects, what a catch-up actually costs, and why the split ratio matters less than where it starts.
The simulator opens set to Cedar Court's exact terms: $100k invested, a 1.8x outcome, 8% pref, five-year hold, 70/30 split, no catch-up. Run it as-is first—then break it.
1 Drag the outcome down to 1.0x—capital comes back, but nobody earns a dime. Below the hurdle, the sponsor's promote is $0 too.
2 Set the pref to 0% and watch the split tier swallow the whole profit—that's the money the pref was protecting.
3 Toggle the catch-up on and watch your total drop—that's what a full catch-up costs you at the same headline split.
$168,000
You receive back in total
1.68x
Your multiple
$12,000
Sponsor promote
Every dollar of profit ($80,000)
Simplified on purpose: simple (non-compounding) pref, all profit paid at exit, full catch-up to the ratio, fees excluded. Real waterfalls live in the deal documents.
Liquidity and the exit
Private deals are illiquid by default: your capital is committed for the hold period, and there is usually no way out early. Some deals offer a redemption window after a lock-up—if an offering doesn't mention redemption at all, read that as 'illiquid until exit', not as an oversight.
The exit is what converts paper value into distributions—a sale, a refinance, occasionally an IPO. 'Hold period' and 'exit strategy' together answer the only liquidity question that matters: when and how do I get my money back?
The waterfall is the deal's payout order: capital back, then the pref, then any catch-up, then the split—all from what's left after the bank.
The pref means investors eat first. It's a priority, not a promise—it can't create money the deal didn't make.
No redemption mentioned means illiquid until exit. Know when and how the money comes back before it goes in.
Reading it is half the job. Run the drills until the answers come without thinking.
Lost on a term? The glossary has every definition in one place.
Educational content only—not investment, legal, or tax advice. Every figure used in examples is hypothetical, including Cedar Court, which is a fictional deal.