Would love for someone to walk me through how a cash flow promote works within a waterfall. If someone has an IRR driven waterfall template with cash flow promote optionality built in, I would greatly appreciate it.
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Can you give an example of what the language in the operating agreement looks like? Not familiar with what you mean by cash flow promote.
Just PM'd. I guess in other words, it's a cash flow hurdle. So if that is the case, I believe the waterfall would need to be separated for cash flow events and capital events? Any IRR waterfall examples of this with the two events separated out would greatly be appreciated.
I've seen these before, and they still really don't create much of a promote until exit anyways. Not many deals (especially right now) will get you past the first hurdle until exit anyways.
Building it out is the same as a typical waterfall. You first have to separate your net cash flow into normal cash flow and capital event cash flows. Then you have two separate waterfalls, but the capital events waterfall still has to take into account the distributions that you already received/paid due to the cash flow waterfall (so the capital event waterfall has it's amount reduced by the distributions already paid from cash flow waterfall and vice versa in the case of a refi mid hold, which is probably the only scenario in which the cash flow waterfall actually starts kicking out a promote within the hold period)
This is it OP, segregate your cash flows then push them through two separate yet interrelated waterfalls for the different types of distributions. Capital events pay down any remaining balance after operating cash flow, and the next period's operating cash flow goes against the new balance net of prior period's capital events.
Thank you, both. In your experience, does the cash flow hurdle only pay if the preferred balance has been fully paid back? Or is it paid on the current?
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