1. Implementing Joint Venture Management
  2. Create Penalty Definitions

Create Penalty Definitions

Create a penalty definition to specify the percentage used to calculate penalties on carried interest distributions.

You can define:

  • A single percentage for all eligible transactions
  • Different percentages for different categories of transactions

Penalty Definition Levels and Processing Order

You can create penalty definitions at different levels, depending on your business requirements:

  • Joint venture level

    Applies to all carried interest agreements in the joint venture.

  • Carried interest agreement level

    Applies to all stakeholder pairs in a specific carried interest agreement.

  • Stakeholder pair level

    Applies to a specific consenting and nonconsenting stakeholder pair within a carried interest agreement.

You can define penalty definitions at one or more of these levels for the same joint venture. This enables you to define a general rule and override it with more specific definitions when needed.

When multiple penalty definitions exist, Joint Venture Management applies them based on specificity:

  1. Stakeholder pair level (most specific)
  2. Carried interest agreement level
  3. Joint venture level (least specific)

If a more specific definition exists, it overrides any broader-level definitions.

Partial Payout Scenario

When penalty definitions are configured at multiple levels, payout can occur at different times for different stakeholder pairs within the same carried interest agreement.

For example, consider the following setup:

  • A carried interest agreement-level penalty definition that applies to all stakeholder pairs
  • A stakeholder pair-level penalty definition with a higher penalty for a particular stakeholder pair

Because Joint Venture Management applies the most specific definition first, the stakeholder pair with the higher penalty typically accumulates a larger balance and therefore reaches payout later than other stakeholder pairs.

As a result, some stakeholder pairs might reach payout earlier under the agreement-level definition, while others remain active under their more specific definition.

If payout is reached for only a subset of stakeholder pairs:

  • The carried interest agreement remains active for the remaining stakeholder pairs
  • The existing stakeholder group is ended as of the payout date
  • The associated carried interest ownership definition ends and is set to Inactive

To continue processing for stakeholder pairs that haven’t reached payout, you must create a new configuration effective the next day:

  1. Create a new stakeholder group with the remaining stakeholder pairs and percentages, based on the terms of the agreement.
  2. Create a new carried interest ownership definition.
  3. Resume processing until payout is reached.

This approach ensures that payout is tracked and completed independently for each stakeholder pair based on the applicable penalty definition. Depending on your business requirements, you can configure penalty definitions and carried interest agreements differently to support continued processing and payout tracking.

Create a Penalty Definition

  1. Navigate to Setup and Maintenance and select the Joint Venture Management functional area under the Financials offering.

  2. Select the Manage Carried Interest Penalty Definitions task.

    Or select More Actions, Manage in Excel and use the spreadsheet to add multiple carried interest agreements. The spreadsheet contains instructions on how to complete the columns, which reflect the fields in the user interface and include a list of values for fields when applicable.

  3. On Carried Interest Penalty Definitions, select Add.
  4. On New Penalty Definition, enter a name and description.

  5. Complete the following fields depending on the level you’re setting up the penalty calculation for:

    • Joint venture only

    • Joint venture and Agreement

      Note: If there isn’t a carried interest agreement in the list, you must set up a carried interest agreement for the joint venture before you can add the penalty definition.
    • Joint Venture, Agreement, Consenting Stakeholder and Nonconsenting Stakeholder pair
    Caution: At this point, if you save the penalty definition, you won’t be able to update these fields or change the penalty selection method. If you need to make these changes after saving, then delete the penalty definition and create a new one.

  6. For the “Penalty selection method,” select one of the following options and then specify a percentage or percentages accordingly to use for penalty calculations:

    • Selected transactions. Use this option to specify a percentage for different types of transactions, which you can identify with an account set or project set. This option enables you to specify different penalties for different types of transactions.
    • All eligible selections. Use this option to specify a percentage to use for the penalty calculation on all carried interest cost distributions associated with distributed transactions.

    You must enter a name and category for each percentage. An administrator will need to configure the Category field with values that match your business needs. You can use these fields for reporting purposes.

  7. Select Submit.

    When finished, make sure to enable penalty and payout processing in all applicable carried interest agreements.