Staple of Cash Flow Waterfalls: 3 Tier IRR Hurdle Distribution Structure
Originally published: 29/11/2021 09:09
Last version published: 09/08/2022 10:58
Publication number: ELQ-41425-3
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Staple of Cash Flow Waterfalls: 3 Tier IRR Hurdle Distribution Structure

Simple one-pager cash flow distribution template that uses IRR hurdles. Just enter Contributions/Distributions at the top.

Recently added a DCF Analysis.

One of the most common ways that a joint venture deal is setup involves an incentive structure that aligns all parties. This template makes all the logic easy to understand and use. You can easily copy and paste the logic into whatever model you want to connect this to as it all fits on a single page. All you would need to do is link in the contribution / distribution requirements in each period.

The types of businesses or deals this kind of scheme applies to most often is those with very predictable cash flows (real estate, oil and gas, utility).

The structure starts by defining the final cash contributions and distributions of the project as a whole. A percentage is entered for how much of the total project contributions come from the GP (general partner/operator) and how much come from the LP (investor).

Then, there are IRR hurdles that define how the available cash distributions are split per period and that will be based on total returns (measured by IRR) received by the LP. Each hurdle as a defined IRR and cash flow split. The higher the IRR for the LP, the more cash the GP gets so you see the GP is incentivized to do a really good job at returning LP money.

This template has broken the cash flow waterfall into its individual parts to make it easy to explain and see at each cash distribution tier. There are up to 3 tiers that can be used and at each tier the detailed distributions and checks are clear.

A final summary shows the amount of cash that flowed to each tier for both the GP and LP as well as the total distributions to each per period and the exit IRR and equity multiple. A visualization also adds to the clarity of cash flows.

This is also a really good financial template for anyone that is trying to understand the math and logic that goes into figuring out how to split the cash based on the IRR of the LP over time. It is really hard if you don't deal with it every single day, but you will be able to learn from the template and formulas used.

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Further information

Provide a simple framework for IRR hurdle-based cash flow distributions.

Any joint venture deal with up to 3 IRR hurdles.

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