I review syndication offers regularly, and one thing I’ve learned is that the headline returns rarely tell the whole story. When sponsors pitch a deal, they often lead with attractive IRRs or projected cash yields — but the promise on paper can hide complex distribution mechanics, sponsor incentives, and dilution risks that materially change my realized return. In this piece I’ll walk you through how I evaluate a syndication offer, focusing on three areas that deserve close attention: waterfall structures, sponsor incentives, and dilution. I’ll share the practical checks I run, red flags I watch for, and simple examples to help you model the outcomes yourself.
Why the waterfall matters more than the headline return
Waterfalls determine how cash flows and sale proceeds are split between limited partners (LPs) and the sponsor (general partner, GP). Two deals with the same headline IRR can yield very different outcomes depending on the waterfall. In practice, waterfalls align incentives — but they also create paths for sponsors to capture outsized returns when markets perform well.
When I open a private placement memorandum (PPM) or investment summary, these are the waterfall elements I immediately seek out and model:
Let me give an example. Two deals both promise a 20% projected IRR to LPs. Deal A has a 6% pref, then a 70/30 split (LP/GP) permanently. Deal B has a 6% pref, a 50/50 GP catch-up to a 12% IRR, then a 70/30 split thereafter. In Deal B the sponsor receives an outsized portion of the gains between 6% and 12% through the catch-up. If the asset outperforms, the sponsor capture can reduce LP net return materially even though the headline IRR looks the same.
How I model waterfalls in 5 practical steps
Many investors I work with underweight timing effects. A sponsor who restructures distributions to receive promote at refinancing or interim recapitalizations can pull value forward and increase dilution risk for LPs who reinvest or roll into the new structure.
Sponsor incentives: alignment or misalignment?
Good sponsors align their economics with LPs in three ways: meaningful sponsor equity, reasonable promote structures, and clawbacks. When sponsors have limited capital at risk, their incentive to maximize long-term value diminishes.
I also evaluate operational incentives. Does the sponsor earn fees (acquisition, asset management, construction) that could incentivize higher fee income over performance? I prefer structures where fees are reasonable, transparent, and offset against promote where possible. If a sponsor charges large fees and also retains a full promote, that’s double dipping.
Dilution: how subsequent capital raises and sponsor actions reduce LP ownership
Dilution happens when additional equity is raised after the initial closing — through recapitalizations, new equity investors, or if the sponsor issues new interests. Dilution can be benign (e.g., bringing in capital to fund value-creating capex) or harmful (e.g., recapitalizing to extract cash and preserve sponsor promote).
To evaluate dilution risk, I ask sponsors three concrete questions and insist on written answers in the operating agreement:
If the sponsor can recapitalize without LP consent and distribute proceeds that preserve or increase their promote, I consider that high-risk. I require LP-friendly protections such as pro rata participation rights or a supermajority approval for recapitalizations that alter economics.
Practical checklist before I commit capital
| Document | What I verify |
| PPM / Offering Memo | Clear waterfall description, pref rate, promote tiers, catch-up, fees |
| LLC Operating Agreement | Clawback, distribution timing, recapitalization rules, GP removal provisions |
| Investor Q&A | Sponsor equity amount, fee schedule, past performance, track record for exits |
| Financial Model | Base/downside/upside scenarios, sensitivity to exit cap rate and timing |
Additionally, I run a quick sanity check on sponsor returns relative to LP returns across scenarios. If the sponsor’s IRR or multiple rises disproportionately in upside cases while LPs’ upside is capped, I probe further. I also quantify the impact of potential dilution on my ownership percentage and distribution timing — these are often overlooked yet significant.
Red flags that usually stop me
On the other hand, a transparent waterfall, reasonable sponsor skin-in-the-game, strong clawback language, and pro rata rights for follow-on rounds make me comfortable proceeding — provided the underwriting itself is solid.
Tools and templates I use
For modeling I use an Excel template that includes:
If you don’t have a template, platforms like RealData and Argus (for commercial) have useful modeling modules. For private models, I prefer keeping the waterfall logic transparent and retaining an audit trail of assumptions so I can show where sponsor promote alters outcomes.
Finally, remember that evaluation is both quantitative and qualitative. A well-structured waterfall and strong anti-dilution protections help, but you still need to trust the sponsor’s execution capabilities. I combine hard numbers with reference checks, portfolio audits, and a careful reading of legal documents before I part with capital. That’s how I turn a promising offering memo into an investment I can confidently recommend to clients and readers.
