When participating in a society structure, it’s common to encounter the well-known 80/20 strategy.

When participating in a society structure, it’s common to encounter the well-known 80/20 strategy.

In this, the promoter of an investment -the manager- is rewarded with a promote: an extra income over the profits obtained once a pre-established minimum return has been reached. The latter is known as preferential rate of return and is fixed according to the project’s risk and its contrast with other investment alternatives.

Measures such as these are used as an incentive for the manager to work towards the highest possible return.

The following is an example of a profit distribution waterfall according to an 80/20 structure:

First event. Recovery: returns the total capital contributed by the investors;

Second event. Preferential return: the payment of this return is destined to investors on their contributed capital;

Third event. Catch-up: the manager receives his proportion of the capital and preferential return;

Final Promote: after covering the capital and the preferential return, the subsequent profit is distributed among the investors, who receive 80%, and the administrator, with the remaining 20%.

In this typical structure, often used in private equity investment funds and real estate projects, the returns do not take into account the fees of the managers, which serve to cover operating costs and do not represent a profit for them.

In short, the 80/20 strategy firmly aligns and intertwines the objectives of the manager and the partners.