Key takeaways
- A JV should state clearly who contributes how much, who bears which risks, and the order in which money is returned.
- An ROE of several hundred per cent usually comes from a small equity base because a large amount of customer money is used, not because the project has become better.
- A waterfall sets the order in which capital and profit are returned, so that the developer's incentives are aligned with investor returns.
Example 1: developer and landowner
The sample project has sales value of THB 324.48 million, total cost of THB 233.52 million and net profit of THB 72.77 million. Buyer instalment payments (down payments) cover 66.5% of sales value, or THB 215.78 million, which is 92.4% of cost. This leaves THB 17.74 million that the project owner must raise.
| Item (THB million) | Total cost | Buyer money | Project owner's money |
|---|---|---|---|
| Land | 35.00 | 30.00 | 5.00 |
| Soft Cost | 6.92 | – | 6.92 |
| Construction | 115.82 | 110.00 | 5.82 |
| Management fee | 19.64 | 19.64 | – |
| Sales and marketing | 42.18 | 42.18 | – |
| Taxes and transfer fees | 13.95 | 13.95 | – |
| Total | 233.52 | 215.78 | 17.74 |
Sharing of equity and profit
| Developer | Landowner | Total | |
|---|---|---|---|
| Share of investment | 95% | 5% | 100% |
| Investment (THB m) | 16.85 | 0.89 | 17.74 |
| Share of profit | 90% | 10% | 100% |
| Net profit (THB m) | 65.49 | 7.28 | 72.77 |
| Profit on investment (ROE over the life of the project) | 388.59% | 820.35% | 410.17% |
The landowner contributes 5% of the equity but receives 10% of the profit, reflecting the value of the land or of becoming a contracting party. Sharing by actual equity would give only THB 3.64 million. The difference of THB 3.64 million is what the developer agrees to give.
How to read this ROE
- 410% is the total profit over the life of the project relative to actual equity. It is not an annual return, so it cannot be compared with IRR.
- If the project required all THB 233.52 million of equity, the same return would be 31.16%. The whole difference comes from using customer money.
- Using customer money for 92.4% of cost requires checking the contract terms, buyer protection and loan conditions. If sales are slower than planned, the equity actually required will be much more than THB 17.74 million.
- The agreement should specify who bears the burden when costs exceed budget, and whether additional equity adjusts the profit shares.
Example 2: LP/GP waterfall
A waterfall is the order in which cash is distributed, used in private equity and real estate JVs. A common structure has 4 tiers.
- Return of Capital and Preferred Return for the LP The LP receives its principal back together with a minimum return, for example 8–10% per year.
- Return of Capital and Preferred Return for the GP The developer receives its principal back at the same rate.
- Catch-up The GP receives an additional share, for example 50/50, up to the agreed limit.
- Promote or Carried Interest The remaining profit is shared proportionally, for example 80% to the LP and 20% to the GP.
Example In the sample project, the LP invests THB 800 million (80%) and the GP invests THB 200 million (20%). The Preferred Return is 8% per year, non-compounding, with a holding period of 2.5 years. Total distributions are THB 2,200 million, and the size of Tier 3 is set at THB 250 million.
| Tier | LP (THB m) | GP (THB m) | Cumulative (THB m) |
|---|---|---|---|
| Tier 1: LP capital 800 + Pref 160 | 960 | – | 960 |
| Tier 2: GP capital 200 + Pref 40 | – | 240 | 1,200 |
| Tier 3: Catch-up 50/50 of 250 | 125 | 125 | 1,450 |
| Tier 4: Promote 80/20 of 750 | 600 | 150 | 2,200 |
| Total | 1,685 | 515 | 2,200 |
| MOIC | 2.11x | 2.58x |
The GP invests less but earns a higher MOIC. This is the incentive behind the Promote.
Points that are often negotiated This example sets the size of the Catch-up as an assumed figure. In a real agreement it is usually calculated until the GP reaches a target share of total profit, for example 20%, and the formula must be clearly defined. Other points include whether the Pref compounds, the capital base used, whether the test is IRR or MOIC, and Clawback rights.
What a JV agreement must cover
- The value of the land contributed, the valuation method and the related taxes
- Who bears the burden when costs exceed budget, and the order of equity increases
- Reserved Matters requiring approval, such as borrowing, selling below the minimum price and changing the design
- Financial reporting cycle and audit rights
- Exit mechanisms, for default or when a party wishes to leave the JV
- The foreign shareholder structure must comply with the law, and Thai shareholders must genuinely invest