PERE Watefall Case Study
Hi guys and gals,
Currently struggling with a case study relating to a waterfall. Can you please help? Would be much appreciated! It is the following:
"An equity fund has been raised to invest in residential multifamily properties. The capital contributing partners ("Limited Partners") will contribute all capital to the fund, and will receive a return of their investment along with a preferred return before the manager of the fund ("Manager") receives any incentive compensation ("Carried Interest"). The calculated fund‐level cash flows are included in Exhibit A, and are shown net of leverage.
Based upon the accompanying net cash flows, build a model that displays what the Manager's carried interest would be under the following distribution structure:
- First, 0.0% to the Manager and 100.0% to the Limited Partners until Limited Partners have received a 9.0% internal rate of return on their invested capital, net of distributions received as of such period;
- Second, 15.0% to the Manager and 85.0% to the Limited Partners until the Limited Partners have received a 14.0% internal rate of return on their invested capital, net of distributions received as of such period;
- Third, 50.0% to the Manager and 50.0% to the Limited Partners until the Manager has received an amount equal to 15% of the fund level net profit through such period (as determined on a cash flow basis);
- Fourth, 15.0% to the Manager and 85.0% to the Limited Partners until the Limited Partners have received a 1.80X equity multiple on total Limited Partner invested capital to date;
- Fifth, 100.0% to the Manager and 0.0% to the Limited Partners until the Manager has received an amount equal to 20.0% of the fund level net profit through such period (as determined on a cash flow basis), and thereafter;
- 20.0% to the general partner and 80.0% to the capital contributing partners.
The Exhibit A is : Year 1: Contributions: -127 702 974 ; Distributions: 2 035 024
Year 2: Contributions: -190 652 894 ; Distributions: 9 623 472
Year 3: Contributions: -178 389 545 ; Distributions: 21 465 356
Year 4: Contributions: -157 523 ; Distributions: 31 486 823
Year 5: Contributions: 0 ; Distributions: 38 724 408
Year 6: Contributions: 0 ; Distributions: 257 133 213
Year 7: Contributions: 0 ; Distributions: 358 535 081
Year 8: Contributions: 0 ; Distributions: 323 083 224
The net yearly cash flow is the difference between contributions and distributions.
The model should include input cells for all of the underlined variables above for dynamic term modification. A table should indicate the amount of cash flow distributed to both the Limited Partners and the Manager pursuant to each tier of the waterfall noted above, and the resulting internal rates of return and equity multiples for both the Limited Partners and the total investment.
Thanks a lot in advance for your help!
1 - pretty bold of you to put the full case study on here. If this is for an interview I would take it down.
2 - You didn't say what part you were struggling with? If you have no concept of how to build out a waterfall you should go watch the A.CRE videos or something similar to get a good base before
If you have a specific question I'd be happy to help.
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Agreed, I've never seen such a convoluted waterfall in our deals or at our fund level carry calc. OP, this isn't overly complex to model it just requires some though. As others have mentioned, take a look a A.CRE for the IRR components. Once you've completed steps 1 and 2 the rest is simple enough maths.
Youre just asking us to do the case study for you? Bold.
If you odnt know how to approach the above maybe you arent cut out for the role.. Agree with the above, spend some time on A.CRE and LEARN.
Speaking as a Sponsor / GP - this is ridiculous. Frankly I laugh at how much time and energy smart young professionals spend on esoteric modeling skills. Have a great CPA firm on retainer, and then pay them to build these waterfalls each time you have a new deal / LP / JV structure.
Spend your time and effort on things that actually add value.
Hi all,
Thank you for your comments.
I never mentioned this case study was for an interview and I am still wondering exactly how to approach this even a few days after I posted this thread. If it was for an interview, would not care by now.
I have gathered a few cases and am trying to work through them (have a few more). This one is tricky because the waterfall is much more intricate than the typical 3/4-tier waterfall based on IRR (or max. + EM) hurdles. Thus, was mainly wondering exactly how to approach the different and many return hurdles.
Would appreciate any input beyond "very bold of you to post a case in this forum"/"go learn online"/"too many return hurdles" as this is just not helpful in this case, unfortunately.
Fully agree, comments above suck ass
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