Investment approach
Contractual 10% Compensation: What It Covers and What It Does Not
DNPI pays the 10% compensation from its fee if the investor's return over the whole project is below the contractual 10%. It is not an annual rate and not a guarantee of capital preservation.
The contractual 10% compensation in the DNPI model works like this: if the investor's return over the whole project, after distribution, is below the contractual 10%, DNPI pays compensation from its own fee. This is a return per project, not an annual rate. It is also not a guarantee of capital preservation. The conditions, the calculation base and the limits of the payment are set by the contract for the specific project.
How the compensation works, step by step
- DNPI's fee is 50% of project profit; the other half stays with the investor.
- Under the contract, the investor's return over the whole project is calculated after distribution.
- If it is below the contractual 10%, DNPI becomes obliged to pay compensation.
- The payment comes from DNPI's fee.
The size of the compensation, the calculation base and the upper limit are set by the contract in this scheme. To see the mechanics, take a worked example, not a forecast and not the terms of a real contract: the investor put in 1 M€, and their share of profit came to €80,000, which is 8% over the project. The gap to the 10% threshold is €20,000. If the contract brings the return up to the threshold in full, that is the size of the compensation. If the contract provides for a limit or a different procedure, the amount will differ.
What the compensation covers
The condition applies to the scenario in which the investor's return over the whole project, after distribution, is below the contractual 10%. If a project brought the investor, say, 6% over its whole term, then under the DNPI model compensation from DNPI's fee arises. Its size, limits and calculation procedure are set by the project contract, and they have to be read in the text before signing.
What the compensation does not cover
| Situation | Why the compensation does not solve it |
|---|---|
| Comparison with an annual rate | 10% per project over two years is about 4.9% a year compounded (worked calculation); over five years it is less |
| A loss-making project | The compensation is not a guarantee of capital preservation; whether a payment is made in a loss and in what amount is set by the project contract |
| The investor's taxes | The contract defines whether the threshold is measured before or after tax |
| Payment timing | When return is calculated and when it is paid is defined by the contract |
| Solvency of the counterparty | The obligation sits with a specific company; the question of what stands behind it remains |
The compensation exists only where it is written into the project contract, and within the limits the contract sets.
How to read the top-up next to DNPI's 50% fee
The condition works on top of DNPI's fee, not instead of it. Three worked scenarios on 1 M€ invested, not a forecast and not the terms of a real contract. The investor's result here is already the half of distributable profit that stays after DNPI's fee.
| Investor's profit after DNPI's fee | Return over the project | What the 10% threshold says |
|---|---|---|
| €150,000 | 15% | Threshold met, no compensation |
| €100,000 | 10% | Exactly at the threshold, no compensation |
| €60,000 | 6% | Below the threshold, compensation arises under the contract's rules |
Even a threshold that is met does not mean the project is a good one. Ten percent over five years and ten percent over one year look identical in a contract and very different in a portfolio. So the return per project has to be set against the term and against where else the same capital could have gone; the article on the opportunity cost of capital covers this.
What to ask before signing
- What amount the return is calculated on: invested capital, capital adjusted for timing, or some other base.
- Whether the 10% threshold is tested before or after the investor's taxes.
- Whether there is an upper limit on the payment and how it relates to the size of the fee.
- What happens if the fee is not enough to cover the compensation.
- How and within what period the return is calculated and the compensation paid, and who checks the calculation.
- What happens to the condition on early exit or in a dispute; see the article on exiting a project.
For a sociedad civil, the Código Civil declares void a pact that releases a participant from all of the share in profit or losses (art. 1691). So it is worth asking an abogado (lawyer) how the compensation is characterised in the legal form of your project and whether it conflicts with the rules of that form.
Who this condition does not suit
The condition will not suit someone who reads "10%" as a promised annual income or as a return of the amount invested. It will not suit someone who is not ready to accept that the outcome depends on the result of the project. Past project results do not guarantee future ones, and the compensation does not replace an assessment of the project itself and its risks.
You can recalculate a project's result under different scenarios in the investor calculator, and how DNPI's fee is calculated before the top-up is described in the article on DNPI's 50% fee.
Questions and answers
What is the 10% compensation in a DNPI project?
If the investor's return over the whole project, after distribution, is below the contractual 10%, DNPI pays compensation from its own fee. The conditions and limits are set by the project contract.
Is this 10% a year?
No. It is the return over the whole project, not an annual rate. The longer the project, the lower the annual return at the same 10% per project.
Does the compensation return the invested capital if the project loses money?
The compensation is not a guarantee of capital preservation. Whether a payment is made in a loss, in what amount and within what limits is set by the project contract.
Where does the compensation come from?
From DNPI's fee. What exactly the fee includes, and whether there is a reserve for a large shortfall, has to be found out from the contract.
