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BENEFITS OF DOCUMENT
A distribution waterfall describes the method by which investment returns are allocated among participants of a group or pooled investment.. Essentially, the total capital gains earned are distributed according to a cascading structure made up of sequential tiers, hence the reference to a waterfall.
Usually, the general partners receive a disproportionately larger share of the total profits relative to their initial investment once the allocation process is complete. This is done to incentivize the fund's general partner to maximize profitability for its investors.
This template includes 4 different examples of Distribution Waterfalls for Private Equity, Venture Capital and Real Estate Investments.
• Private Equity – 80/20 Split
The 80/20 Model assumes that the Limited Partner receives first the Principal and Preferred Return
Then the remaining proceeds are distributed 80% to the investors and 20% to the Private Equity Firm.
• Private Equity – GP Catch Up & 80/20 Split
In a preferred return with GP catchup, once the preferred return hurdle is met, the GP receives all or most of the future profits until the GP catches up to its 20% carry amount.
After that the profits are split 80% to the LPs and 20% to the GP
This model allows user to select if the Catch up calculation will be performed "Before Principal" or "After Principal".
The "Before Principal" option is an aggressive compensation structure and the catch-up is equivalent to 20% of the committed capital and the preferred return.
The "After Principal" option is is the most common example of a distribution waterfall. The steps are as below:
1. First 100% of all cash inflows are distributed to the LP until the cumulative distributions equal the original capital invested.
2. Then 100% of all cash inflows to the LP until the LP has received a preferred return on the capital invested
3. After that a "20% catch-up" to the GP equivalent to 20% of the remaining proceeds
4. Finally all remaining proceeds are distributed 80% to the LP and 20% to the GP.
• Real Estate – 4-tier IRR hurdle Waterfall
The model allows for up to four tiers (IRR hurdles) and assumes only one sponsor (i.e. GP) and one LP.
The first tier distributes cash flow to the partners until the LP has achieved some defined preferred return and received a full return of capital.
After the preferred return hurdle is hit in tier one, cash flow is distributed in tiers two through four based on a defined promote structure and hurdle rates as outlined by the user.
• Venture Capital – Investor Returns with multiple Exit Scenarios
This model is suitable for a startup company or early-stage venture including multiple rounds of investments and investors returns analysis.
It includes assumptions per round of FD Shares Outstanding and Invested amount from Owners, Employees, Seed, Lead and Other Investors.
The model calculates Preferred Participation and Dividends per round, Ownership percentages at each round, Total Cash Flows at Exit and computes the Internal Rate of Return (IRR) and Cash-on-Cash multiple (CoC) for each investor using different exit value scenarios.
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Source: Best Practices in Deal Structuring, Private Equity Excel: Distribution Waterfall Models - PE, VC & Real Estate Excel (XLSX) Spreadsheet, Profit Vision
ABOUT THE AUTHOR: PROFIT VISION
Profit Vision provides Consulting & Outsourced Financial Services as well as Financial Planning & Performance analysis to small and mid-size businesses by implementing efficient and effective tools to assist them with start-up business plans or improve their ongoing operations.
Our range of services include Financial & Operational Analysis, Business Planning, Budgeting & Forecasting, Cash Flow Planning, M&A/LBO Modeling, Business Valuations and more.
We also offer a collection of ready-to-use financial templates covering a variety of industries (Real Estate, Hospitality, Manufacturing, Energy, Food & Beverages, Retail, Healthcare, etc.), as well as tailor-made financial modeling services adjusted to customers' business requirements providing flexible solutions in building a bespoke forecast for their business.
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