Cash Flow Waterfall with 3 IRR Hurdles (Excel XLSX)

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.