For my own Sanity: MD wants me to put a 4 hurdle waterfall together with a “catch-up after every hurdle”
Have a traditional waterfall with a 80/20 catch up after preferred return. Followed by a 70/30 split / and 50/50 split. Now he wants me to have a catch up after every hurdle but how does that work…? Has anyone done something like this before? I think he is working off a 80s back of the napkin approach with the end result being the same but think I just need to show it to him visually.
Perhaps after each hurdle you get the promoted % (above equity share) to the stated IRR. Conceptually, to me this sounds like your MD doesnt expect there to be sufficient CF to hit each hurdle so he wants you all protected.
So all it is is if you have a hurdle of 14% and the deal returns 15% the GP may get 0 or only a portion back, it is only going to affect the last hurdle
Here is what is happening once you get a hurdle lets say 14% the GP gets 0 dollars then catches up to the LP at 14% then on the next hurdle lets say 20% the GP gets nothing until the deal gets to like 21% the LP takes 20% and the GP catches up with the rest of the dollars.
It is going to be an if/or statement type thing in whichever ends up being your last waterfall to ensure the LP got his full amount, it messes with everything, but if you are clearing a hurdle far and away it doesn't do anything.
pm me
This was a good example for me to get a handle on multiple hurdles:
https://www.adventuresincre.com/real-estate-equity-waterfall-model/
I don't know what LP would ever allow for more than one catch-up, this seems like a ridiculous exercise unless you're fleecing mom and pop shops.
Maybe this is a European vs American waterfall situation where the asset has to fill the tier for the LPs before the GP starts getting their slice of that tier?
Seriously man. It was ridiculous, but MD was just trying to placate and show how ridiculous it was for a shop of our size. MD was being asked to do so by principles that focus on operations not investments.
What exactly is a catch up? The waterfalls I see have cash flow being distributed pro rata until LP hits pref. Then gp starts getting paid out promote (GP share of cash flow increases / LP share of cash flow decreases). Where does a catch up come into this?
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