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:

Preferred Return

Preferred Return (Multiple Classes)

Internal Rate of Return

Return of Capital

Pro-Rata

Cash-on-cash Return

Cumulative Return

Total Return

Management Fee

Catch-up

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 will calculate an annual return percentage for a class that each investor will earn based on their initial investment date.

Definitions:

  • Compounding Frequency: Selecting a compounding frequency will add the accumulated preferred return to the initial investment when calculating future preferred return.

  • Ignore pref return before start date: Toggle this option to not include any earned return before 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.

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.

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 collect any relevant fees collected during distributions, calculated as a percentage of the remaining distribution amount. Most commonly used as the first hurdle to collect a percentage based fee of the total distribution.

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

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