Profit Distribution and Carried Interest Waterfall
Originally published: 18/05/2020 06:09
Last version published: 30/06/2021 09:43
Publication number: ELQ-46089-4
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Profit Distribution and Carried Interest Waterfall

A template illustrating various setups of profit distribution between the JV partners with a carried interest waterfall

This template describes real-world mechanisms of distributing profits between project participants. It starts with modeling a distribution to a preferred partner, who has priority rights on the distributions and receives a guaranteed return on his investment, until his contribution is repaid. Even thereafter he might be eligible to some equity incentives (kickers), which are included in this model as well.

Remaining profits are then distributed between common shareholders. A common setup in many private equity and other investment ventures is when a minority partner (general partner) carries out investment management activities. To motivate the general partner his proportion in profits can be made higher than merely his equity share if the project performs well.

This mechanism is called ‘carried interest’ and is normally set up in tiers, or buckets. Every tier corresponds to a certain level of profit to limited partners. Within every tier profits are distributed between GP and LP in a certain proportion. When a tier is filled, distribution moves to the next tier. Every successive tier has a distribution proportion more favorable to the general partner.

Under most carried interest arrangements, there are three hurdles introduced:

Hurdle 1 – preferred return. This covers the initial investment and some minimum profitability (e.g. 20%). In this bucket profits are distributed in proportion to equity participation. In some cases limited partners keep all earnings.

Hurdles 2 – catch-up. Once the interests of limited partners are satisfied, the general partner ‘catches up’ on his profits. In this bucket a more substantial portion of earnings is assigned to him.

Hurdle 3 – carried interest itself. The general partners starts getting an even higher share of profits.

In some ventures there can be more hurdles.

This template has four levels of tiers but can be amended to a higher number if needed very quickly. It can be built into your financial models, used for the calculations of actuals (also when payments occur at non-regular intervals) or for making accounting accruals.

The template is made in a very structured way which allows putting it, if required, into deal documentation and correspondence.

The model is supported by four charts:

1) A chart depicting every contribution and distribution on a timescale, with cumulative cashflow (exposure), estimated breakeven point and cash position at the end of the project.
2) A chart illustrating the waterfall (total contributions, distributions and split between the partners)
3) A chart showing annual and cumulative cashflows to every partner
4) A chart showing total contributions and distributions to every partner

This Best Practice includes
1 Excel file

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Further information

Calculate carried interest based on distribution waterfall

Joint ventures or partnerships with carried interest arrangements



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  • Bill Bertha
    Andrei - this looks great, thanks for publishing. Since you're probably very familiar with the functionalities and/or limitations for this model, I was wondering if you think this version could be modified to include individual portfolio company investments as well as other nuances related to projecting out LP/GP returns for a Fund that has already begun investing capital (i.e. a mix of assets in the ground and portion of unfunded remaining)? Thanks!
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    • Andrei Okhlopkov
      Hello Bill,
      Thanks for reaching out !
      The model analyses the total cash flow which can be comprised of individual assets' cash flows and other associated incomes and expenses. The numbers can be based fully on a forecast, a combination of actual and forecast or fully on the actuals (to calculate/adjust distributions after the fund is closed).
      Alternatively, you can populate a copy of the model for every asset in the fund. The models will perform the necessary calculations and produce the outputs which you can combine in a summary table. Having this analysis you will see how every asset drives the distributions, determine if there is any clawback arising from previous payments etc.
      Thanks again and let me know if there is any further help needed !
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