How Investors are Paid: MLG’s Private Fund Return Structure

The series of MLG Private Funds provides investors with access to investment opportunities that aim to produce tax-advantaged cash flow and appreciation over time. The Funds focus on growing investors’ wealth, capital preservation and diversification within private real estate investment.  

Understanding how and when returns are sent to investors is perhaps one of the most important elements of any investment structure. Within the private markets, there are a myriad of different structures that may exist. These structures can be frequently misunderstood.  

Our Funds utilize a “European equity waterfall return structure”. This is specifically designed to be an investor friendly return structure. This demonstrates our firm’s commitment to investors and our confidence in our ability to execute.  

MLG Private Funds Return Structure:  

Our latest Fund, Private Fund VI, intends to underwrite potential investments to a target internal rate of return of between 11% and 15% (net of Fund expenses and fees), on a leveraged basis. Each of our funds utilizes a three-tiered return structure. 100% of available distributions are paid to investors as follows1;  

• (Tier 1) 8% cumulative preferred return on invested equity 
• (Tier 2) 100% return of original principal invested, after a full 8% cumulative preferred return is paid  
• (Tier 3) 70/30 profit sharing split (Investors/MLG) of remaining cash flow distributions after full 8% and 100% return of original principal  

Subject to available cash flow, each fund makes distributions to investors, quarterly, and preferred returns begin to accrue immediately after an investor’s equity is admitted to the fund. From there, capital then participates in the tiers noted above over time.  

Tier 1 – 8% Cumulative Preferred Return 

The 8% cumulative preferred return is the annual return that our investors earn on their invested equity. In the early years of the Fund, it is not likely that a Fund will distribute a full 8%.  

For example, let’s say in year 1 the Fund distributes 5%. Within the structure, an investor will accrue the 3% that was not distributed to them (5%+3% = 8%), it will sit as a liability on the books of the Fund, and the Fund will owe that to the investor. Any accrued, unpaid preferred return compounds annually at 8% interest.  

Once all investors are caught up on unpaid preferred returns, we then move to tier 2 of the return structure.  

Tier 2 – 100% Return of Capital 

Once all preferred return balances have been paid to investors, Tier 2 begins.  

Typically, this tier is driven by liquidity events such as the refinance or sale of an asset which produces distributable net proceeds. Due to sales and refinances being periodic it’s common in this tier to receive chunky return of capital distributions during this tier.  

While we’re returning investors’ capital we will continue to accrue an 8% preferred return on the balance of their invested equity. For example, if an investor has received 50% of their original capital back, plus the full 8% cumulative preferred return on those monies, the 50% of unreturned capital that remains in the fund will continue to accrue an 8% preferred return until that remaining capital is returned to the investor.  

Tier 3 – 70/30 Profit Sharing Split 

After all investors are current on their 8% preferred return and have a 100% return of their capital, we will enter Tier 3 of the return structure. In Tier 3, all remaining cash distributions (profits) are split between the Investors and MLG with 70% going to investors and 30% going to MLG.  

This will continue until the final asset has been sold within the fund and the final distribution is made to investors.  

Dollars in your pocket:  

Now, what does this look like in terms of actual dollars in an investor’s pocket? 

In the example below, you can see how a hypothetical $1,000,000 investor from MLG Private Fund I was paid over the course of the investment. A few things to note:  

1. Our Fund unit sizes are $1,000,000, or 1 unit. We allow fractional units (i.e. subscriptions of less than $1,000,000) 

1. As of 12/31/2023 Fund I produced a 19.9% IRR, net, to investors. 

1. Fund I was a 2012 vintage fund which sold its last asset on May 12th, 2023. 

Past performance is not an indication of future results. 

The “Annual Cash Flow” column represents the total amount that the investor received each year. The “Total Distributions” column then represents the cumulative distributions to the investor throughout Fund I’s lifecycle.  

As you can see, investors in Fund I received some large returns particularly in the middle years of the fund while we were selling the majority of the Fund’s assets. These return of capital distributions are part of our liquidation strategy. This can afford the opportunity for our investors to put their equity back to work in another investment opportunity.   

At MLG, we always strive to have an investment opportunity open for investment. This can help investors create tax efficiency and potential savings, more on The Tax-Efficient Power of Re-Investment here.  

Investing in private commercial real estate can be a powerful tool to grow your wealth, though it may take years of investing to achieve the long term returns one desires. If you’re interested in learning more about our Private Funds, please reach out to investors@mlgcapital.com. 

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Charlie Jacques supports the Investor Relations team at MLG Capital, splitting his time between working with investors and seeking advancements and efficiencies in the teams’ internal operations. Charlie has a passion for financial literacy and strives to help each investor fully understand the immense benefits of investing in private real estate. Outside of work, Charlie spends his time exploring the Colorado Rocky Mountains come rain, snow, or sun.