This article will explain each type of Waterfall Hurdle currently available on the InvestNext platform and breakdown how to configure it for your specific use.
Please select a waterfall hurdle below to learn more:
Return of Capital (Multiple Classes)
Cash-on-Cash Return (Multiple Classes)
Term Definitions:
Title: Select a custom title to display for the waterfall hurdle.
Distributed to unit class: Choose the relevant class(es) to be included in the hurdle requirements.
Day Count Convention: Selecting a day count convention will dictate how the number of days is counted from an investment date based on several available options.
Start Date Override: An optional common date to start calculating returns for all investors. The most common use case would be to set a project closing date.
End Date Override: An optional common date to stop calculating returns for all investors. The most common use case would be to set a project exit date.
Distribute until each investor in each unit class individually reaches IRR/Return: Selecting this option will allocate funds to each individual investor until the specified requirement has been reached.
Distribute by pro-rata split: Selecting this option will allocate funds proportionately, based on contribution amount, until the specified return requirement has been met for the entire class(es).
Preferred Return
The preferred return (pref) hurdle calculates an annual return percentage for a Class, with each investor earning based on their initial investment date (or Start Date).
NOTE: You can also specify a Start Date for your investment which is the same date for all investors so your distributions are NOT based on each investor' initial investment date.
The Preferred return hurdle is calculated based on the outstanding capital balance.
Definitions:
Compounding Frequency: Selecting a compounding frequency will add the accumulated preferred return to the initial investment when calculating future preferred return.
Start Date Override: Specify a single Start Date for your distributions that is not based on each investors’ initial investment date by entering the Start Date in the Start Date Override field.
Ignore pref return before start date: Enable this option to exclude any earned return before the date entered in the 'Start Date Override' field.
Example
Preferred Return (Multiple Hurdles)
Operating based on the same calculation method as the Preferred Return hurdle above, the "Preferred Return (Multiple Hurdles)" hurdle will allow you to simultaneously allocate funds to multiple classes, each with a unique rate.
The Preferred return hurdle is calculated based on the outstanding capital balance.
For clarity, the allocations will be made based on daily accrual. In the example below, Class A investors will be accruing at 8% while Class B investors will be accruing at 12% rather than both accruing at 8% and then Class B getting topped up to 12% (if you would like to do that, set both classes to 8% and then add an additional single Preferred Return hurdle for Class B at 12%).
Example
Internal Rate of Return
An Internal Rate of Return (IRR) hurdle will allocate funds to the class(es) identified until their total return to date has met the specified IRR, with individual and pro-rata options for individual allocation within classes.
Example
Note: Our system calculates the IRR using an Actual/Actual day count, which will include variances such as leap years. This may cause slight differences between calculations that are done in Excel/Google Sheets which may use an Actual/365 day count.
Return of Capital
The return of capital hurdle will allocate funds to return the investor's initial contribution.
Example
Pro-Rata
A pro-rata hurdle will proportionately allocate funds based on the investors' contribution amounts, with the ability to specify a percentage share between different classes.
The Pro-Rata hurdle is calculated based on the investor's Units.
Example
Cash-on-cash Return
Cash-on-cash return measures annual cashflow against the original contribution amount. Or put another way, it's the equity multiple divided by years elapsed. The hurdle will allocate funds to the class(es) identified until their total return to date has met the return requirement.
Example
Cumulative Return
The cumulative return hurdle will set a requirement for a set total capital (cash) return regardless of the timeframe for the specified class.
Example
Total Return
The total return hurdle will set a requirement for a set total percentage return regardless of the timeframe for the specified class.
Example
Management Fee
The management fee hurdle will allow you to pay any relevant fees collected during distributions.
This hurdle is most commonly used as the first hurdle in a distribution plan to collect a percentage based fee of the total distribution.
It can also be used as the only hurdle in a distribution plan.
This hurdle can be calculated in three different ways:
Calculated as a percentage of the remaining distribution amount.
Calculated as a percentage of capital balance.
Uses market value to figure out distribution amounts.
NOTE: If you are using the option: Percentage of the Remaining Distribution, you will need to manually enter the amount of the distribution when prompted. You cannot use pay down all hurdles to calculate the distribution.
The system will use the amount you have entered for the distribution to calculate the management fee based on the percentage in the hurdle and then calculate the additional hurdles in the distribution plan.
Example:
Catch-up
The catch-up hurdle is used to distribute a fixed percentage of distributions received by a specific unit class. A common use would be for a GP to receive a catch-up of 10% of the distributions (all or only pref) received by the LPs.
Example
