2 Hurdle Preferred Equity Waterfall - Repay Equity>Attain ROI Target
Originally published: 17/03/2020 13:59
Last version published: 17/03/2020 16:25
Publication number: ELQ-94293-2
View all versions & Certificate

2 Hurdle Preferred Equity Waterfall - Repay Equity>Attain ROI Target

A dynamic joint venture waterfall model with 3 cash flow splits across 2 hurdles. Up to 10 years on an annual basis.

The goal of a joint venture waterfall model is to offer unique risk/reward parameters for potential investors (LP) in a way that is beneficial and satisfactory for both the GP and LP.

This template makes everything really simple to explain because of what the hurdles actually are. All the user has to do is plug in the percentage splits for each waterfall tier, the desired equity multiple (hurdle 2 - more on that later) and the available cash flow per year.

Hurdle 1: LP and GP share cash flows at a pre-defined rate until 100% of the LP equity is returned. This usually means the LP (investor) gets a majority of the cash flows until they get their initial investment back.

Hurdle 2: Any cash returned after the LP gets their equity back is measured until a pre-defined equity multiple is reached by the LP. This is often something close to 50/50. i.e. if the equity multiple hurdle is entered as 1.5, it means cash is split at 50/50 rate (or whatever % is defined for tier 2) until the LP has received a 50% ROI (1.5 multiple).

Finally, after the equity multiple has been reached, any cash flow returned after that is split at a final 3rd percentage. This is often in favor of the GP and would be anywhere from 70/30 to 90/10.

The percentages and multiple hurdle are going to be defined based on the deal at hand. It just depends on how much assurance the LP wants and how much upside the GP wants. Somewhere in there is a spot both parties can agree.

Everything is 100% dynamic and cash wills split for a given year partially in one, two, or three tiers depending on the result of the hurdles being achieved.

There is no preferred return in this model.

There is a final summary that shows the IRR and final equity multiple of the LP and GP across all cash distributed over the entire life of the projection as well as a visual chart that allows the user to see the cash flow distributions each year.

Also, a DCF analysis is included for the final cash flows that go to the LP and GP.

This Best Practice includes
1 video and 1 excel template

Acquire business license for $95.00

Add to cart

Add to bookmarks


Further information

Test out different deal scenarios for a joint venture with preferred equity.

Forecast up to 10 years and requires knowing annual available cash flow.

No preferred return logic.


  • Be the first to review this Downloadable Best Practice

    Write a review


More Best Practices from Jason Varner

See all

Any questions on 2 Hurdle Preferred Equity Waterfall - Repay Equity>Attain ROI Target?

The user community and author are here to help. Go ahead!

0.0 / 5 (0 votes)

please wait...