Re-Earning Promote: Pricing the Control Premium in GP-Led Recaps

Core Principle

Promote is not preserved in a GP-led recap by assertion. It is re-earned through demonstrable value creation and an institutional process that LPs can support without compromise. Absent those elements, “promote retention” becomes a request for compensation unmoored from measurable outcomes.

What the Control Premium Actually Is

A control premium is not a fee. It is the present value of operating and financing actions that the sponsor is uniquely positioned to execute. It is evidenced through leasing outcomes achievable within defined timelines, capital programs with identifiable payback, and financing work that materially improves duration, cost of capital, covenant headroom, and refinancing certainty. It also reflects demonstrated counterparty access and market execution that a passive owner or replacement manager cannot replicate at the same speed or certainty.

The correct way to define control premium is through a “with sponsor” and “without sponsor” underwriting construct. The “without” case should assume a third-party manager, slower leasing execution, more market-standard G&A, and less effective financing outcomes. The “with” case should reflect the sponsor’s actual plan, relationships, and cadence. The delta in projected NOI trajectory and exit outcomes between those cases, net of fees, is the control premium. If the control premium cannot be quantified and tied back to a defensible valuation impact, the sponsor is asking LPs to pay for narrative rather than results.

Build Price Integrity First

Promote economics should not be debated before the strike price is institutional. Pricing must withstand scrutiny from selling LPs, rolling LPs, and new capital, as well as the internal standards of an LP investment committee. That requires a market check that is real, documented, and comparable to other institutional liquidity processes.

In practice, price integrity typically includes an advisor-led process to source a lead buyer through a limited auction, independent valuation support or a fairness perspective, and standardized information access across all decision cohorts. Information symmetry is foundational. Every party should be working from the same data room, model, Q&A process, and risk disclosures, regardless of whether they intend to sell or roll.

LPs focus on strike NAV because it is consequential in multiple directions. It sets the baseline for carry crystallization. It determines the economic experience of rolling LPs when new capital enters. It becomes the reference point for any claim of a control premium. If price integrity is weak, the remainder of the structure inherits that weakness.

Engineer LP Choice as a Designed Outcome

A credible recap must include a clean election framework. LPs should have two clear paths: liquidity at strike pricing net of disclosed costs, or a rollover into the continuation vehicle on the same economic terms as new capital. The election period must be long enough to permit internal approvals, typically measured in business days rather than calendar urgency. The process should be free of pressure tactics, implied penalties, or asymmetrical access to information.

A practical, plain-language tax memorandum should be provided early enough to inform decision-making. The same disclosure package, model, and risk factors should apply to both cohorts. A roll decision must be treated as an investment choice, not a test of loyalty to the manager.

Reset the Economics, Not Only the Hold Period

A recap that merely extends duration without resetting economics will struggle to earn broad support. The economic terms should reflect the updated risk profile and the improved information set that exists at recap.

Fee bases should typically migrate from gross asset value to NAV at close. Fee step-downs should be explicit and automatic, with further step-downs as NAV declines or the portfolio de-risks. Transaction, financing, and monitoring fees should be fully offset against management fees. Costs must be bounded through defined caps on organizational and transaction expenses at the continuation vehicle level.

Carry should be simple, legible, and defensible. A common institutional approach is to structure promote as value creation above strike pricing plus a preferred return, rather than as a continuation of historical economics without adjustment. Where whole-asset carry is used, hurdle and catch-up terms should be recalibrated to reflect the new profile and reduce the risk that LPs are paying promote on value that is not incremental. Carry escrow and clawback should be incorporated so that a portion of GP economics remains at risk until outcomes are realized. Performance measurement should be net of all fees and hedging costs, to ensure LPs are not paying promote on gross performance that is partially funded by structural leverage or cost transfer.

Make GP Alignment Visible in Cash

Alignment must be demonstrated through economic exposure, not language. Rolling a substantial portion of crystallized carry into the continuation vehicle is one of the clearest signals available. A fresh GP cash commitment further reinforces alignment, particularly when the continuation introduces new duration and execution risk.

Distribution terms should reinforce that LP capital is senior to GP liquidity. Early distributions to the GP should be constrained until the LP preferred return is current. Co-investment, where offered, should be provided on market terms and should not be used to create preferential arrangements that undermine the integrity of the primary election.

Governance That Earns Institutional Support

Governance is the mechanism through which LPs evaluate whether the sponsor is requesting compensation for control while remaining accountable for outcomes. A credible governance framework assigns operational control where it is required and establishes consent rights where risk and conflict are most acute.

Day-to-day operations should remain with the GP within an approved plan, including leasing within defined parameters, capex within budget, and hedging within agreed limits. That is the functional scope of sponsor control. Consent should be reserved for decisions that change risk materially, including asset sales, debt incurrence beyond plan, affiliate transactions, material revisions to the business plan, budget variances beyond defined thresholds, and extensions beyond the stated term.

Conflict controls should be explicit and durable. Where conflicts exist, an independent committee or refreshed LPAC structure that includes rolling LPs, selling LPs, and new investors can strengthen credibility. That committee should have independent counsel. Affiliate services should be competitively tested or governed by a pre-agreed fee schedule with clear disclosure.

Key person and removal provisions belong in the same conversation. A key person test tied to named individuals, with fee suspension and defined investor engagement upon a trigger, is increasingly standard. Removal for cause should be practical to execute. Removal without cause, where included, should be structured to protect legitimate hard costs but should not indemnify hypothetical future carry. These terms are not punitive. They are a signal that the recap is not designed to insulate the GP from accountability.

Put the Capital Stack to Work

A recap is also a moment to improve the capital structure. Debt extension, refinancing, or re-hedging executed alongside the continuation close can reduce risk and improve outcomes, provided proceeds are used transparently to right-size leverage, protect the business plan, or provide partial LP liquidity. Debt work should not be used to obscure or subsidize GP economics.

Hedging should be defined in advance, including the form of protection, limits, and the treatment of hedging costs in the hurdle and underwriting. Covenant flexibility should be addressed prior to launch. Lender consents should be treated as a condition to closing, not an item to be solved after LP elections.

When executed properly, capital stack improvements become evidence supporting the control premium. When executed poorly, they become a reason for LPs to prefer an outright sale.

How Promote Portability Actually Works

Promote does not transfer by implication. It moves only through explicit contractual terms, and institutional LPs evaluate those terms with increasing precision.

Common structures generally fall into a limited set of templates. One approach is full crystallization with a defined rollover of realized carry into the continuation vehicle, paired with a value-creation carry construct above strike pricing. Another approach is partial crystallization with recalibrated hurdles and moderated catch-up terms. A third approach is a full roll of unrealized economics into the new vehicle, coupled with reduced fees, fresh GP cash, and carry escrow.

Regardless of structure, the term sheet must clearly address the carry base, hurdle, catch-up design, escrow and clawback, the percentage of GP economics rolled, the fee base and step-down mechanics, and the governance provisions governing removal and affiliate transactions. Portability is not a concept. It is a list of terms, and it must be written as such.

Underwriting the Control Premium

If LPs are being asked to support a control premium and a promote outcome, the sponsor must tie claims to evidence and measurable impact.

On operations, the sponsor should present leasing progress that is real and time-bound, supported by executed leases, advanced negotiations, broker support, and a credible cadence tied to market depth and tenant quality. On capex, the sponsor should define scope, unit economics, expected downtime, and the before-and-after NOI profile. On financing, the sponsor should provide a clear articulation of rate outcomes versus market, fees saved, covenant headroom, and maturity runway.

Timing discipline matters. LPs will assess which actions will be realized within the continuation term and which are outside the horizon. The present value of these items, adjusted for execution risk, is what supports any claim that sponsor control is accretive and therefore compensable.

Process Discipline as Promote Defense

If control premium is justified by execution capability, promote is defended through process integrity. Institutional LPs support GP-led recaps when they appear to be real transactions rather than bespoke mechanisms to preserve economics.

A dual-track approach can be highly effective. Testing an outright sale in parallel with a continuation supports the claim that continued ownership is superior to selling at current pricing. Comprehensive disclosure of GP economics before and after the transaction, including fee revenue and carry outcomes under base, downside, and upside cases, improves decision quality and reduces governance friction.

Voting mechanics should be designed to withstand scrutiny. LP elections should be documented, and approval thresholds should be clear. Where appropriate, GP and affiliates should be excluded from voting. Ongoing reporting should be strengthened, with a defined KPI package tied to leasing, capex, debt, and hedging, not limited to financial statements.

These elements position the recap as an institutional solution that LPs can defend internally. That distinction matters both for the immediate vote and for the sponsor’s credibility in future fundraising.

Actionable Checklist

Price integrity should be supported by an advisor-led market check and an independent valuation or fairness perspective. LP elections should be clear, economically comparable, and supported by information symmetry and a practical tax memorandum. Fees should reset to NAV at close, incorporate explicit step-downs, provide full offsets for transaction-related fees, and include hard expense caps. Carry should be clearly defined with a new hurdle, a defensible catch-up structure, and escrow and clawback provisions. GP alignment should be visible through the rollover of crystallized economics and a fresh GP cash commitment. Governance should include a clear consent grid, explicit conflict protections, key person terms, and practical removal mechanics. Debt and hedging should be negotiated and conditioned at closing, with lender consents secured. Reporting should include a defined KPI cadence and variance approval thresholds. Disclosure should be consolidated into a single package that an LP can take to an investment committee without supplementing core economics from side conversations.

Close: Re-Earn, Do Not Merely Retain

A GP-led recap is a test of whether sponsor control is measurably accretive and whether the sponsor is willing to subject economics to the discipline of an institutional process. If the sponsor can quantify its operating and financing edge, establish price integrity through real market testing, and present governance that preserves accountability, promote can be defended as earned rather than preserved. If those conditions are not satisfied, the market will price the asset as though sponsor presence is replaceable, and LP behavior will reflect that conclusion.your true control premium.