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If you are new to IRR hurdles, don't feel bad that it is not immediately clear. Studying the logic and flow of this template will help anyone have a better understanding of how such structures work at a basic level. You most commonly see this type of deal in real estate and oil/gas joint ventures.
Recent Update: Added a DCF Analysis with NPV.
This is a great template for anyone involved in joint venture deals, wants to learn how IRR Hurdles work (the math and logic behind it) and/or anyone looking for a more sophisticated approach to approaching investors for a potential partnership structured as a GP (sponsor or general partner) and LP (investor or limited partner).
All the logic fits on a single page so it can easily be copied and pasted into an existing deal and have the top-line cash contributions and distributions referenced into the top light yellow cells. All the math will run from there.
The purpose of such a strategy is to align incentives. The way this cash flow waterfall works is that based on the defined IRR Hurdles, the LP (the one that contributes most or all of the initial required investment) will give up some of the cash flow as the GP meets higher and higher returns for them.
The GP (the one that does all the work/operations and may contribute a smaller initial investment amount) is then incentivized to do so because that is how they earn a premium for the work they are doing.
This directly incentives the GP to do their job as optimally as possible because that is how they will earn the most money and the LP will receive higher total returns as the GP does a better job with operations.
You can structure this as a hard preferred return / pari passu / or something else just by adjusting the cash flow split percentages in the first hurdle. These kinds of financing structures are most common in businesses with fairly predictable cash flows, but you can use them in any deal you see fit.
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Source: Best Practices in Cash Flow Management, NPV Calculator Excel: Cash Flow Waterfall with 3 IRR Hurdles Excel (XLSX) Spreadsheet, Jason Varner | SmartHelping
ABOUT THE AUTHOR: JASON VARNER | SMARTHELPING
I graduated in 2011 with a Bachelors degree in Accounting. From there, I worked at a few small businesses doing financial reporting and some bookkeeping. After a few years of that, I started doing freelance financial consulting work on Elance and Upwork.
After over 400 jobs completed with a 100% success rate, I now run my own modeling/consulting practice, conduct live streams on YouTube Monday and Tuesday mornings and continue to build new financial models.
I occasionally take on custom financial modeling work.
Jason Varner | SmartHelping has published 105 additional documents on Flevy.
This business document is categorized under the function(s): Corporate Finance
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File Size: 37.8 KB
Related Topic(s): Cash Flow Management NPV Calculator
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Initial upload date (first version): Nov 23, 2022
Most recent version published: Nov 25, 2022
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