n this collaborative discussion, let’s consider the sponsor’s problem. Recall

 

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.

Create a post that responds to following questions:

  1. Can the sponsor, or general partner, continue to achieve such high returns? Framed another way, can the general partner earn a 25+% return on the $6,305,000 received at the end of the 10th year? If so, how? If not, what are the challenges?
  2. Should the general partner accept lower IRRs over the long term, exchanging high IRRs for the ability to invest more capital in each deal? Why or why not?

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