GP stakes: The carried interest modeling challenge

1. Management company structure and revenue attribution

GP stakes are structurally complex: you're investing in a management company (ManCo) that earns fees from multiple funds, each with different terms. Understanding revenue attribution across fund vintages is critical for forecasting cash flows.

What Omega extracts from ManCo and fund documents:

• Entity structure — ManCo ownership, GP entities per fund, carry vehicles, blocker structures
• Management fee schedules — rates, calculation basis (committed vs invested capital), step-downs, offsets
• Fund-by-fund attribution — which funds flow fees to which ManCo entity? Any master-feeder or parallel fund complexity?
• Carry allocation — what % of GP carry flows to ManCo vs individual partners? Vesting schedules, clawback reserves
• Other revenue streams — transaction fees, monitoring fees, portfolio company consulting, co-investment fees

Example: Multi-fund fee schedule

A mid-market buyout firm manages four funds:

• Fund IV (2019 vintage, $500M): 2.0% on committed capital during investment period, then 1.5% on invested capital
• Fund V (2022 vintage, $750M): 1.75% on committed capital during investment period, then 1.25% on NAV
• Fund VI (2025 vintage, $1B): 1.5% on committed capital, no step-down (perpetual fee funds)
• Continuation fund (2024, $200M): 1.0% on NAV, plus 10% promote on gains

Omega builds: A fund-by-fund fee forecast model showing the rolloff of Fund IV fees (exiting investment period), scaling of Fund V fees (NAV-based as exits occur), and stable Fund VI fees (no step-down). Critical for understanding revenue trajectory.

2. Carried interest waterfall modeling

The majority of GP economics come from carried interest, but waterfall structures vary widely and are often misunderstood. European vs American, deal-by-deal vs whole fund, catch-up provisions — each materially impacts timing and magnitude of carry distributions.

Key waterfall parameters to extract:

• Preferred return (hurdle) — typical 8%, but can be 6-10%, compounded or simple, on committed or invested capital
• Catch-up provision — does GP catch up to 20% of total distributions after hurdle? Full catch-up or partial?
• Carry split — 80/20 LP/GP is standard, but can be 70/30 or tiered based on performance
• Clawback mechanism — interim carry distributions subject to clawback if final fund performance falls below hurdle
• Distribution timing — deal-by-deal carry (faster) vs whole fund (backend-loaded)

Example: European vs American waterfall

American waterfall (whole fund):

"All distributions shall be made: (i) first, 100% to LPs until they receive return of capital plus 8% preferred return; (ii) second, 100% to GP until GP has received 20% of aggregate distributions; (iii) thereafter, 80% to LPs and 20% to GP."

European waterfall (deal-by-deal):

"Distributions from each Investment shall be allocated: (i) first, 100% to LPs until they receive return of capital plus 8% preferred return on that Investment; (ii) thereafter, 80% to LPs and 20% to GP."

Omega flags: European waterfalls generate carry earlier (on a per-deal basis), while American waterfalls defer carry until the entire fund clears the hurdle. This dramatically impacts the timing of GP cash flows and thus the present value of your stake.

3. Key person dependency and succession planning

GP stakes are fundamentally human capital investments. If the senior investment professionals leave, fundraising stops and carry value evaporates. Understanding key person provisions and succession plans is existential.

Critical provisions to extract:

• Key person definition — which individuals are "key persons"? How many departures trigger an event?
• Key person consequences — does the fund suspend new investments? Can LPs vote to remove GP? Fee reductions?
• Successor provisions — promotion pipeline, junior partner carry participation, non-compete terms
• Compensation structure — profit-sharing among partners, discretionary vs formulaic carry allocation
• Retention mechanisms — partner vesting schedules, garden leave, equity rollover requirements

Example: Key person event analysis

A GP stake in a healthcare-focused PE firm depends on three senior partners who collectively source 80% of deal flow. The LPA specifies:

"If two or more of [Partner A, Partner B, Partner C] cease to devote substantially all professional time to the Fund within any 12-month period, a Key Person Event shall occur. Following a Key Person Event, the Fund may not make new Investments without approval of 66 2⁄3% of LP interests."

Omega extracts: Names, departure threshold (2 of 3), and LP consent requirement. For diligence, this flags concentration risk — the entire investment thesis depends on retaining at least two of three individuals. Any succession plan must be evaluated against this contractual dependency.

4. Fundraising track record and forward pipeline

The value of a GP stake is primarily driven by future funds, not existing funds. Historical fundraising success predicts future fee streams, but market conditions and competitive positioning matter.

What Omega analyzes from historical fund docs:

• Fund size progression — is the firm growing AUM? Stable? Shrinking?
• LP retention rates — what % of LPs re-up from fund to fund? Anchor LP concentration risk?
• Fundraising speed — time from first close to final close, oversubscription vs underfunding
• Fee evolution — are fees compressing (market pressure) or stable (strong brand)?
• Strategy drift — any material changes in investment strategy, geography, or sector focus?

Example: Fundraising trajectory

A GP has raised four funds over 12 years:

• Fund I (2012): $150M, 18 months to close
• Fund II (2016): $300M, 14 months to close
• Fund III (2019): $500M, 9 months to close
• Fund IV (2023): $750M, 12 months to close (market slowdown)

Omega identifies: Strong growth trajectory through Fund III, with Fund IV showing market headwinds (slower fundraising despite larger size). Key diligence question: Is the 12-month close a function of market conditions (2023 vintage) or firm-specific challenges?

The Omega workflow for GP stakes

1. Upload LPAs for all active funds — Omega parses fee structures, carry terms, key person provisions
2. Extract ManCo agreements — partner economics, profit allocation, carry split between ManCo and individuals
3. Build waterfall models — fund-by-fund carry projections under base, downside, and upside scenarios
4. Analyze key person risk — map LPA definitions to actual team structure, identify concentration
5. Forecast fee streams — model forward fundraising, apply historical LP retention and fee compression trends

Time savings: Manual GP stake diligence (parsing 3-5 LPAs, building waterfall models, analyzing key person risk) = 60-80 hours. With Omega: Initial analysis in 4-6 hours, sensitivity modeling automated.