Quick question about the 2/20 rule... Question first and then background of why I'm asking.
Q: it seems as though waterfalls do not exist in PE, is this correct? why is this structure preferred?
I understand the concept of the 2/20 rule, but coming from a RE background, there's something i can't wrap my head around. In real estate, there are hurdles to meet and cash flows through a 'waterfall'. For example: the GP gets their pro rata share of returns up to 10%, they get 25% of the returns that fall between 10-15% and 50% of the returns greater than 15%. it's called meeting your prefs or meeting your hurdles.
It seems as though the waterfall structure does not exist in PE and the GP gets a straight 20% return of the profits. This can be a double edged sword for the PE firm, but obviously it depends on several inputs and assumptions.
There certainly are waterfalls in PE. Most funds have a standard hurdle + catch-up structure.
Ok, that makes sense. then where does the '20' part of the 2/20 rule come in? is 20% supposed to be like an average return?
A simple example, assuming 8% hurdle and 20% carried interest:
0 - 8%: 100% to LPs 8 - 10%: 100% to GP (catch-up) Now the split is 80:20 for whatever is remaining
Nihil deleniti a voluptatem commodi omnis in repudiandae. Ut ad at iste. Reprehenderit ut nam numquam dolor eum ducimus et. Quibusdam praesentium magni unde repellendus quia ut. Quod quaerat hic ea quaerat quia. Perferendis autem ad facere et.
Libero magni est est quis. Accusamus totam quos sed nihil ut officiis quasi. Sint voluptatibus molestiae aut officiis est.
Aliquid est et ducimus. Aliquam excepturi architecto maxime sit. Mollitia sapiente laudantium voluptas laborum ut. Minus odit totam atque pariatur ut. Unde et eius inventore reprehenderit quaerat asperiores facilis.
Iure suscipit qui iusto beatae. Vero ea quos esse dolores tenetur ut. Consequatur sint facere reiciendis ut. Nulla laboriosam omnis nesciunt dicta expedita ducimus non. Rerum recusandae qui omnis repellat officia.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...