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If you are looking into a joint venture as an LP (investor) or GP (sponsor/operator) then some thing to plan out are how much does each party contribute of the required cash flow and how does the available cash available to distribute flow back to each party.
In general, the LP is going to provide most of the money and the GP is going to do most of the work (as an operator). The GP may or may not be contributing capital. It depends on the operating agreement and there is no single right way to do these.
The goal of a joint venture template like the one you see here is to make it clear what the financial impact will be for each party based on assumptions about future cash flows and equity contributions / repayments.
The general idea of using hurdle rates is that the LP wants to give the GP an incentive to provide the best returns possible to the LP. The 'incentive' in this case is to offer the GP a higher share of the cash flows available as the total return to the LP increases.
• Non-compounding, simple interest return calculations
• Up to 10 periods (easily expandable by dragging last column over for as many periods as necessary)
• Define the preferred return due to the LP and up to two additional hurdle rates
• Define how cash is split up until the next hurdle rate is achieved (4 total tiers)
• Define equity contributions by the LP/GP
• Define equity repayments/buyouts if applicable
• Define available cash flow to distribute in each period
• The model will calculate the cash flow going to each party based on the simple interest-non-compounded hurdle rates for the LP
Note, these hurdles are not IRR Hurdles. They are simple interest hurdle rates and there may or may not be language about how equity is repaid and when. The Excel template separates out the preferred return accruals and the equity contribution / repayment.
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Source: Best Practices in Deal Structuring, ROI Excel: Preferred Return Template: Non-Compounding with Three Hurdle Rates 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 and continue to build new financial models every few weeks. [read more]
I occasionally take on custom financial modeling work.
Jason Varner | SmartHelping has published 124 additional documents on Flevy.
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