LP equity invested $5,000,000, preferred return 8%, exit proceeds $9,000,000 after 5 years, tier 2 hurdle 12% with an 80% LP / 20% GP split, tier 3 hurdle 15% with a 70% LP / 30% GP split, final tier 50% LP / 50% GP.
At exit, the $9,000,000 in total cash flow is distributed in order: first, $2,000,000 in accrued 8% preferred return; then $5,000,000 returning the LP's original capital — together, $7,000,000 back to the LP before any profit-sharing begins.
The remaining $2,000,000 in profit flows through the promote tiers: $1,000,000 splits 80/20 ($800,000 to the LP, $200,000 to the GP), and the final $1,000,000 splits 70/30 ($700,000 to the LP, $300,000 to the GP).
Total LP distributions: $2,000,000 + $5,000,000 + $800,000 + $700,000 = $8,500,000, for a 1.7x MOIC and roughly an 11.2% IRR over the 5-year hold.
Total GP distributions (the promote): $200,000 + $300,000 = $500,000 — earned without contributing equity capital in this scenario, illustrating why GP IRR is not a meaningful metric when the sponsor's capital contribution is zero. In that case, use the GP's total promote dollars and the deal's overall profit split to evaluate sponsor compensation instead.