Waterfall structure help
In the following example, I'm trying to determine the generally accepted waterfall structure. Is this the correct order:
- LP return of original capital
- GP return of original capital
- LP 8% preferred return
- GP catchup
- LP promote split
- GP promote split
- Seller rollover
- Management pool
If the structure includes a MOIC based promote split of:
Under 1.5x MOIC: 100% LP / 0% GP
1.5x MOIC: 80% LP / 20% GP
3.0x MOIC: 70% LP / 30% GP
And 3x is hit for a 30% share of the promote going to the GP. Does that 30% also apply to the GP catchup provision?
How is the catchup typically calculated? Is the following example correct?
Waterfall:
Based on the most helpful WSO content, here's how waterfall structures and catchup provisions are typically handled:
General Waterfall Structure
The order you provided is mostly correct, but there are nuances to consider. A standard waterfall structure often follows this sequence: 1. LP Return of Original Capital: LPs are repaid their initial investment. 2. GP Return of Original Capital: If the GP has co-invested, they are repaid their initial investment. 3. LP Preferred Return: LPs receive their preferred return (e.g., 8%). 4. GP Catchup: The GP receives a catchup to align their returns with the agreed promote split. 5. Promote Split: Remaining profits are split according to the promote structure (e.g., 80/20, 70/30).
MOIC-Based Promote Split
For the MOIC-based promote split you mentioned: - Under 1.5x MOIC: 100% LP / 0% GP - 1.5x MOIC: 80% LP / 20% GP - 3.0x MOIC: 70% LP / 30% GP
If the 3.0x MOIC is achieved, the GP receives 30% of the promote. However, this does not automatically mean the 30% applies to the GP catchup provision. The catchup is typically calculated separately.
GP Catchup Calculation
The GP catchup is designed to bring the GP's share of profits in line with the agreed promote split. Here's how it generally works: 1. After the LP preferred return is satisfied, the GP receives 100% of the next cash flows until their share of total profits matches the promote split (e.g., 20% or 30%). 2. Once the catchup is complete, the remaining profits are split according to the promote structure.
For example: - If the promote split is 70/30 at the 3.0x MOIC level, the GP catchup ensures the GP receives 30% of the total profits up to that point. - After the catchup, the remaining profits are split 70% to the LP and 30% to the GP.
Key Considerations
If you have further details or specific scenarios, feel free to share for a more tailored explanation!
Sources: When does the promote split actually occur?, https://www.wallstreetoasis.com/forum/real-estate/waterfallpromote-nuance?customgpt=1, LPs/Investor Return Structure, Waterfall Model Help, Best way to learn Real Estate Waterfalls?
The waterfall would go:
Equity proceeds: $30m
Management pool: -$3m
Diluted equity: $27m
Seller rollover: -$2.7m
Fund proceeds: $24.3m
Return of capital (LP/GP): $10m
Gains: $14.3m
LP pref: $5.3m
GP catch up: $2.3m ($5.3m / 0.7 = 7.6 * 0.3 = 2.3)
Remaining to distribute: $6.7m
To LPs: $4.7m (70%)
To GP: $2.0m (30%)
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