Deal Level: IRR equity waterfall

IRR waterfall for allocation of equity returns to investment partners.

by Shaun Barker
CA (SA) Financial Modeller at IHS InvestmentsFollow

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Description
This is a short demonstrational model that can be used to explain how an equity waterfall works. This model can also be used in other models by inserting your project profits and into the designated line and the waterfall will do the rest. The first Waterfall is the return of equity to all partners (this will return their equity contributions), the second waterfall is the target IRR returns for each partner, starting with partner 1. The third and final waterfall is the allocation on any remaining profits after the partners have received both the initial equity contributions and their target IRRs, this final waterfall is a pro-rata between all the partners and is not a hierarchy like the first and second waterfall.

All formulas are as simple as they can be and the model is evenly spaced and easy to follow, with the important checks in place to ensure the no obvious error should go unnoticed.

One thing to note is that as this is a simple waterfall, there is no operational equity draws and it is assumed that all equity is what was initially allocated.

This model is 100% free, however if you do decided to use it for business purposes, please consider re-downloading it via the paid option.

This Best Practice includes
1 Excel document