Split

What is a ‘Split’ in a Syndication?

In the context of syndication teams, splits refer to the division of profits between the syndicator (sponsor) and the investors. The split is typically structured as a “promote” or “waterfall” distribution model. This means that the profits are split in tiers based on certain performance benchmarks, such as achieving a specific return on investment (ROI) or reaching a certain level of profits. 

For example, a typical split might be 80/20, with the syndicator receiving a 20% share of the profits and the investors receiving an 80% share. However, this split can vary depending on the terms of the partnership agreement. More experienced syndication teams will generally have splits that favor the syndication, while less experienced syndication teams will attract investors by offering investor-weighted splits.

It’s important to note that splits do not include fees paid to the general partner team. While splits are a distribution of profits, fees should be viewed as costs to run the project, which get paid first as an operating expense.

Splits and Syndication Evaluation

Splits can serve as a valuable tool for investors to analyze syndication teams and assess the alignment of interests. Typically, more experienced syndicators tend to structure splits that favor themselves, reflecting their track record, expertise, and the value they bring to the investment. While this may appear to benefit the syndicator more, it can also signify a level of confidence in their ability to generate higher returns for investors. 

Investors should consider the syndicator’s reputation, past performance, and overall investment strategy when evaluating whether the split is reasonable and fair, given the anticipated risks and potential rewards. Ultimately, splits provide a framework for assessing the financial incentives and risk-sharing dynamics within a syndication team, allowing investors to make informed decisions based on their investment goals and risk tolerance.

Splits play a critical role in a waterfall structure of a syndication, which is a structure that outlines how profit distributions are made. They can also be a signifier of a syndicator’s experience or risk perception of a potential investment. Evaluating splits involves considering the syndicator’s reputation, past performance, and strategy, as well as assessing the alignment of interests and risk-sharing dynamics. Ultimately, splits provide investors with a valuable framework for making informed decisions aligned with their investment goals and risk tolerance.