Two Promote Structures in One Waterfall
Can someone please refer me to an example file, or explain how I can create a waterfall with two separate promote structures in the same deal? E.g. raising $10M in equity, $5M is a 10% pref with 60/40 after; the other $5M is 8% pref with 70/30 after.
Use your brain. This is not hard…
Just... build two waterfalls with $5M of the equity flowing to each and the pro rata share (5/10 = 50%) of cash flow running into each?
It sounds like a simple solution, but does that really work? Even if they've only put in 50% of the equity they are still entitled to 100% of the cashflow until the pref rate is met (I would think!). Without knowing terms of the JVA it’s hard to say what happens between the 8%-10% return rates.
They are entitled to 100% of their PRO RATA cash flow. If they have 50% ownership, that is 50% of total cash flow.
Once you've divvied up that top line item between the two, you can run 8% and 10% prefs using those 50% shares on their respective equity commitments.
This is what I ended up doing. Works
How do you not end up double counting promote? Make sure that total waterfall cash flows )both), equal the deal level cash flow.
They do when you allocate pro-ratably. Sum total distributions and contributions from both waterfalls and it will equal total deal-level.
are cashflows from the deal split pro rata pari passu? Meaning every $1 gets split 50/50 equally at the same time? This is a "deal term" not a modeling convention or rule, so you need to be 100% for sure on that. There can be situations where there is an internal preference and ordered systems for each (would need to be detailed in the deal docs).. where like first group gets return of cap with pref, then other group gets return of cap with pref, then move into each hurdle.
If its the simple pro rata pari passu method, then just splitting the cash flows 50/50 and doing two sep waterfall calcs will work fine.
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