Distribution Waterfall Introduction

The five introductory distribution waterfall videos combined into one for convenience. Click here to download the template (available just beneath the video player): www.asimplemod...
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[@RoadAheadWithAJ]

Thank you so much! This is by far the clearest explanation of the waterfall I have come across. Its cleared up so many doubts for me

[@ASimpleModel]

Great to hear! Thanks for commenting!

[@thierryp555]

Stumbled on this while I was starting my PE career at a large Canadian pension fund and have been hooked on your videos since. Really great material vulgarizing the more complex and nebulous financial concepts of private equity. Keep up the good work Peter! Everyone should sign up to your website. A LOT of quality stuff there.

[@ASimpleModel]

Thank you! That is great to hear. And congrats on getting started in PE! Really appreciate the note. More content to come!

[@MPS72192]

As somebody who just started a new job in PE without any other experience, thank you for this!

[@ASimpleModel]

Great to hear you found it helpful! And congrats on securing the job!!!

[@bryanlee124]

I needed to gain an understanding of the cash flow/waterfall model for my upcoming internship assessment and this video helped me out so much! Thank you for making this video accessible to everyone!

[@ASimpleModel]

Awesome to hear! Thanks for taking the time to write!

[@rudyjones1139]

One of the best video series on youtube.

[@ASimpleModel]

Thanks Rudy! Most appreciated.

[@davidrussell2083]

Awesome video -- Clear and concise!

[@ASimpleModel]

thank you!

[@satishnadigatla5592]

simple, clear and deep explanation. Im not able to access link. Thaks

[@ASimpleModel]

www.asimplemodel.com/financial-curriculum/financial-modeling/leveraged-buyout/distribution-waterfall

[@guillaumedesclee5170]

Fantastic video. My questions are: 1. How do you include the management fees taken by the GP in this model? - which impact on IRR and cashflows? 2. What about the investment commitments by the LP in these calculations? - management fees are taken on the total amount committed or just the amount invested? - same for hurdle rate? Thks for your help!

[@ASimpleModel]

Hi Guillaume - these are terrific questions. Might be a little difficult to answer concisely in comments, but in the order presented: (1) This depends on how management fees are charged. If it is at the company level, the management fee would be paid like any other expense (runs through income statement) and consequently would not show up in proceeds. But the cash effect would already be included in the overall IRR because these distributions have been made during the hold period by the company. If charged as a % of AUM, then you would need to subtract these fees from proceeds to arrive at the IRR net of all fees. (2) PE firms typically charge for the total amount committed, but then sometimes reduce this to a percentage of the capital that was actually deployed. But there are always exceptions to "market" terms. Advent Intl, for example, recently got rid of the preferred return on one of its funds, which is unique. Typically the same hurdle rate would apply to all transactions within the fund. I thought a few links might help: www.asimplemodel.com/topic/18/private-equity/private-equity-fund-structure/ and www.asimplemodel.com/reference/77/fundless-sponsor-economics/ Hope that helps!

[@guillaumedesclee5170]

@@ASimpleModel Thank you so much for the time you took in answering my question. I'm searching a lot of information to get to understand better how PE models work and you are clearly offering the best info about this topic. Thanks also for the links. Indeed really helpful!

[@ASimpleModel]

@@guillaumedesclee5170 Thank you! Really appreciate your feedback!

[@guillaumedesclee5170]

@@ASimpleModel I did some changes in your model by integrating the management fee and the investment commitments. Still very simple. I can send it to you if you want? Just let me know. Thks again for your precious work!

[@ASimpleModel]

@@guillaumedesclee5170 That would be great. Please feel free to email me at [e-mail]. Thanks for your interest!

[@oliviercouton924]

Awesome model & video : Now my questions are for a particular target allocation : 1- Would you alternate Money back / pref - Money back- pref or Money back-Money and then pref - pref for each partner ? 2 - What happened in :bad state of the world" where there is not enough to distribute ? Does 1 partner gets some of his investment back and the other gets a loss ? 3 -What happens when you implement the non-recourse liabilities of some contributed assets exceeds their basis ? How would do reflect a minimum gain chargeback in your model ?

[@prashanthkumar2044]

Really cool explanation, I would like to suggest you to elaborate more as it will be more understandable for beginners like me. Thank you

[@ASimpleModel]

Thank you, we are currently working on more content related to compensation at exit (for a control private equity transaction). It should be available on the website in the next week or two. All the best!

[@heykayy]

i love your explanation! you've just earned a new subscriber :)

[@ASimpleModel]

Thank you!

[@TobiasTeeter]

Wait. Shouldn't the return original investment to LP be made and them the 20:80 starts above that line, thus catch up would be 25% of the preferred return about to get back to 20:80 split of PROFIT?

[@ASimpleModel]

Hi Toby, generally the LP gets the return of invested capital plus the 8% pref. The catch up then gets the GP up to 20% (of the pref plus the catch up) so that the 80/20 split can be achieved (that's the most common model). That said, you will find a lot of variations. It all comes down to what you can negotiate. Hope that helps!

[@ultimatekick1]

Very well explained and illustrated!

[@Axle_Max]

These videos are awesome

[@ASimpleModel]

Thanks!!!

[@xsweetl0ux]

I am not sure I understand why the pref return of 8% is calculated on the full $10m invested and not on $8m. Does this model assume that the LP funded the 100% of the capital in this transaction ? I assumed that the capital invested would have also been split 80-20 to begin with. If the model assumes that the LP funded 100% of the capital invested, then would the 20% proceeds going to the GP be considered their promote ? Hope this makes sense ! Thanks for the video

[@ASimpleModel]

Great comment. This assumes that all of the capital was provided by the LP. You can also have situations where the GP invests under the same terms as an LP to demonstrate that they are perfectly aligned with their investors, in which case the waterfall would run the same way (GP investor participating on this basis would be listed in the equity cap table with the other LP investors, but the GP investor would still benefit from the carried interest). If the GP invests outside of the promote structure, then the waterfall would not include that capital. Hope that makes sense! Feel free to follow up.

[@pardhasaradhivattigunta8745]

Very clear and clean explanation!!! Thanks

[@jherrod561]

Thank you !! Very helpful. Where do you explain tab 4 and tab 5 for the IRR Hurdles?

[@mr.pavanvlogindia8646]

Hi Sir, Please explain Waterfall provision in private equity fund and also explain methods of European and American Waterfall methods.

[@JK-ss8yf]

Nice vid! Only seems as if catch-up is higher than pref return. I think that's not correct. Catch-up is typically only a quarter of pref return.

[@guptaakhilesh1989]

Hi, in Step 3 you are assuming that 100% payout is being made to GP until GP receives 20% of overall return (Step 2 + Step 3). However can you provide a formula with same illustration wherein in step 3, GP will be getting 80% proceeds and LP will be getting 20% proceeds until GP received 20% of Overall return (Step 2 + Step3).

[@chanman201]

could you include clawback into the model as wel?

[@ken-ip4ih]

8:58 Don't understand why you just didn't multiply the sum of row 42 and row 47 by 20%... It still gives you the same number

[@royal-recordz]

You had me at, "sometimes it gets lucky"

[@ASimpleModel]

I worked for a wildly self-deprecating, brilliant investor for several years whose favorite line was "even a blind squirrel finds a nut sometimes." Hardly ever gave himself credit ("I'd rather be lucky vs. smart all day..." :)

[@bhavanagangishetty6907]

Could u plz explain Fund Accounting as well..many people are in need of it...

[@ASimpleModel]

We are currently focused on the acquisition side, but I will definitely keep this in mind when we start evaluating new topics.

[@davidkonzen542]

Why is it that in each of the sheets, the percentage that is filled into the first IRR hurdle doesn't factor in to any calculations? It isn't a predecessor or successor for any cells. For example, look at D27 on 20% After Pref & 80_20. The cell doesn't do anything.

[@ASimpleModel]

Hi David, the first hurdle is the return of principal. Rather than increase the principal by 0% to achieve the first hurdle, I simply linked back to the investment (thinking it would make the logic easier to follow vs an additional formula). The step, however, is always highlighted in the documentation detailing how the waterfall works. So I left the reference in their so that it would match the legal language in the video / notes. Hope that is helpful!

[@nellyingabire981]

very helpful video. Many thanks!

[@footyvidz2168]

The description of the scenario in 'tab 3' is confusing. The language suggests that CU = (CU + PR + RC)*20%, but in fact the calculation shows that CU = (CU + PR)*20% (at 16:14) If the calculation in 'tab 3' actually matched its description's language, i.e., CU = (CU + PR + RC)*20%, then CU in 'tab 3' would > CU in tab 2. But it isn't.

[@ASimpleModel]

Thanks for writing! Step 3 on tab 3 throws a lot of people off (I think this is the step that makes the distribution waterfall difficult for so many to understand) . It states that the catch up is equivalent to 20% of the distributions in steps 2 and 3 (excluding step 1, which is the return of principal). In other words, step 2 is the 8% preferred return less the principal. The language in the Excel workbook attempts to mirror what you might find in the corresponding legal document (stripped of a lot of extra language and vocabulary). Hope that helps!

[@sarfhsiddiqui1530]

Do you have an example of ongoing contributions and distributions and what it does to the ending balance? Sort of like Cash Waterfall.

[@saiteja5496]

Understood very much.. Thank you ..

[@ASimpleModel]

You're most welcome

[@bpptk007]

how to calculate the carry/catch up if investments have come on seperate dates?

[@jameshusentoff2953]

Does this only happen when the fund is liquidated or for each year?

[@jcrueda91]

Hello, great video thanks for sharing. I have a question why are the ratios of the split flipped?

[@ASimpleModel]

Thanks! And good eye! The text description in row 19 is incorrectly flipped in the video, but all of the formulas are correct. If you download the model it is reversed: www.asimplemodel.com/financial-curriculum/financial-modeling/leveraged-buyout/distribution-waterfall/

[@copy-pro]

Quick question, why divide by 80% vs multiply by 20% for the catch up?

[@ASimpleModel]

Hi! Dividing by 80% and multiplying by 20% results in two very different outcomes. 100/80% =125 hope that helps!

[@HLB-x7f]

Thank you so much!

[@christopheralexander9386]

Any chance you have a waterfall / fee calculation template for hedge funds, accounting for contributions and withdrawals?

[@ASimpleModel]

Unfortunately I primarily focus on private equity. We may tackle it in the future, but not at the moment...

[@navneetsharma4524]

Can we have this excel ? Please.

[@avikroy6444]

Is this 80 20 universal please provide more videos on custody ,broker and client 3 way reconciliation

[@ASimpleModel]

Hi Avik, the intermediary (or broker) representing the transaction is compensated under transaction expenses, which can be found in the sources and uses table in an LBO model (video explanation: www.asimplemodel.com/model/28/leveraged-buyout-model/simple-lbo/ see chapter titled "Sources & Uses"). This fee is entirely independent of the distribution waterfall, which defines the economic relationship between the equity participants and the sponsor (private equity firm). Hope that is helpful!

[@avikroy6444]

Please provide more accounting regarding to fund

[@ASimpleModel]

Hi Avik, at the moment we are doing a deep dive on private equity training, which should launch in the next few weeks. This will focus primarily on sourcing, analyzing and closing transactions. Fund accounting would be more of a back office function. For the foreseeable future we are continuing with the former, but hopefully we will have an opportunity to address this once this next course is live. Thanks for the comment!

[@Maria-ij8bc]

How did you calculate the IRR of 24,6%?

[@onlyarkasha]

Very helpful thank you!

[@ASimpleModel]

You're welcome!

[@pavankumars2961]

Can we get this excel workbook?

[@ASimpleModel]

www.asimplemodel.com/financial-curriculum/financial-modeling/leveraged-buyout/distribution-waterfall

[@ruslanakhalaia1193]

What software did you use to prep this video?

[@ASimpleModel]

Hi, we use a combination of the following: Adobe Creative Suite (Premiere, Photoshop, Audition) and Camtasia.

[@mym8330]

Why not provide a link to the spreadsheet

[@ASimpleModel]

Hi! There's a link to the spreadsheet just underneath the video player. Click on the link and it will take you to ASM's video player. You can find the "Download Model" button just underneath the video on the left-hand side.

[@leonardonolasco4591]

Can i used this in Residential Real Estate Project?

[@ASimpleModel]

Yes, the tab titled RE Waterfall in the workbook associated with this video would likely be most useful to you. www.asimplemodel.com/model/82/leveraged-buyout-model/distribution-waterfall-introduction/

[@deeptisharma4272]

you are awesome as alwys :))

[@ASimpleModel]

thank you!

[@scarlettbabywang9890]

great♥

[@ranjit9574]

Am not able to download pls help

[@ASimpleModel]

The template is also available here: www.asimplemodel.com/reference/65/distribution-waterfall/

[@rudolphbattle8238]

still didn’t include the management fee for every year 😏

[@ASimpleModel]

haha, good eye! this waterfall does not include a management fee. For a fund the first tier typically does, though not always (as you clearly seem to know :). For an independent sponsor that is charging a fee, if it is based off of EBITDA and charged directly to the company (since it would not be off AUM), then it is done via a management services agreement (MSA) and can be excluded from the distribution waterfall (fee paid by company vs LP). I have always really enjoyed acquisition entrepreneurship and want this channel to be relevant to both funded and unfunded approaches. But it can be tricky on account of how many structures exist... (as you likely also know).

[@dkkeepsimiling9536]

Can u send template?

[@ASimpleModel]

Hi, you can download it here: www.asimplemodel.com/reference/65/distribution-waterfall/

[@nikitap4821]

Can I get a link of excel

[@ASimpleModel]

Hi, the link in the description will send everything distribution waterfall related to your inbox. You can also use this link: www.asimplemodel.com/model/82/leveraged-buyout-model/distribution-waterfall-introduction/

[@mym8330]

Slowly

[@pratikagarwal3186]

Not audible