Waterfall Profit Distribution Model (up to 4 Tiers)

We are introducing our 4-Tier Waterfall Profit Distribution Model. The waterfall profit distribution model template aims to support a thorough analysis of profit-sharing agreements at the deal level, such as those used in Private Equity or real estate investment partnerships. The template models the sharing of profits at a deal level and assists in analyzing different profit-sharing and distribution scenarios.

This comprehensive Excel model template allows the design and analysis of multi-tier profit-sharing agreements between General Partners (GP) and Limited Partners (LP). The four tiers will enable the definition of different hurdle rates in terms of preferred returns that need to be achieved and the use of varying profit sharing for each tier. The model also supports the implementation of GP-catch-up clauses if the GP provides a part of the investment and catches up to a defined preferred return target. In addition, the preferred return calculation Excel template also supports Lookback provisions, where the LP could ask to claim back some of the profit sharing already paid to the GP at the time of exit.

This template provides a comprehensive tool for analyzing different tiered profit-sharing schemes for Private Equity transactions using the General and Limited Partners model.

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This Waterfall Profit Distribution Model Template in Excel analyzes multi-tier profit-sharing arrangements for a defined cash flow stream (e.g., using the cash flow projections to shareholders of an expected private equity transaction or real estate investment). The template includes a profit-sharing waterfall calculation of up to 4-tiers, each with a different hurdle rate and profit share assumption between the General Partner and Limited Partner. In addition, the model also foresees a GP Catch-up and Lookback provision. You can use all options in this template or only activate select tiers and clauses.

In this profit-sharing plan template, you must specify your private equity deal’s expected contributions and distributions over the following years and expected cash flow dates as primary input. The model then calculates the required preferred returns per the profit-sharing assumptions that must be generated before profits can be distributed at the following higher-up tiers.

You can easily simulate various scenarios using only a simple one-tier structure or a more sophisticated four-tier profit distribution waterfall to figure out what might work best for your specific transaction. Modeling the cash flows of the Private Equity deal is not part of the model (it will need to be done using a separate model). This template only looks at a given forecast of contributions and the expected proceeds over time.  

The Main Idea Profit Sharing Calculations

Why do we need to share profits when somebody manages our investment? The answer is to provide motivation and incentives to make the deal perform well and align interests between the General and Limited Partners. Any profit-sharing calculation will need to reflect this main principle.

Key components of profit-sharing mechanisms are hurdle rates, percentage of profit share, and profit-sharing tiers. What is the hurdle rate in private equity? A hurdle rate is the preferred return to qualify for a specific profit-sharing rule. A tier defines the categories to apply different profit-sharing rules.

Key Features of our Waterfall Profit Sharing Distribution Model Template

The model comes with a variety of exciting features and options to analyze your next profit-sharing arrangement:

  • Tiered Profit Sharing: The template models a profit-sharing distribution waterfall of up to 4 Tiers. A hurdle rate and profit-sharing assumptions can be entered for each tier.
  • Flexibility: Choose if you want a one-tier or a four-tier profit-sharing scheme. Our template allows us to activate each tier separately, run endless scenario simulations, and study each scenario of how to share the expected profits of the deal in detail.
  • GP Catch-up: Provided the GP contributes with his funds to the investment amount, the GP catch-up clause in private equity allows a mechanism in place that after the LP has obtained the preferred return of the first tier, also the GP can receive a specified preferred return on his capital before additional profits are shared.
  • Lookback Provision: Our Excel template includes a lookback provision. Lookback meaning, we can re-claim previous profit distributions in case the LP investor would not achieve a certain return. This feature ensures that GPs are correctly compensated for exquisite past general performance, similarly motivating them to pursue future success.
  • Fee Incomes: In addition to modeling the sharing of profits, the template also allows the estimation of the additional fee income the GP may achieve when managing this deal.
  • Charts and Summary Tables: Various charts and summary tables are provided to explain the essence of this transaction to the parties.
  • Sensitivity Analysis: A sensitivity analysis indicates the impact on IRR (either LP, GP, or at Deal Level) if contributions or proceeds of the deal would be higher/lower.

Preferred Return Calculations are provided in an Excel Template

Preferred return calculations for different hurdle rates are cumbersome to design, especially when dealing with multi-tier profit-sharing schemes. An already ready-built Excel template comes in handy in providing the required calculations.

What are Profit Sharing Example Scenarios that can be Analyzed?

The template allows a thorough analysis of profit-sharing examples and detailed scenario analysis, such as:

  • What kind of return does the deal need to generate to achieve the desired returns of the parties?
  • How much capital does the GP and the LP need to put down, and what is the impact on the party’s risk?
  • How many tiers might your profit-sharing model want to use?
  • What the foreseeable impact might be on the profits or downside risk of the Limited Partner and the General Partner
  • Whether to use a GP catch-up clause and what might be the expected financial impact.
  • Whether to use a Lookback Provision or what impact such provision would have on the expected profits.

Why Choose Our 4-Tier Profit-Sharing Formula Spreadsheet?

This template is designed to support the analysis of typical profit-sharing agreements at a deal level for private equity investments to be put in place between General and Limited Partners:

  • Negotiation Tool: Whenever you negotiate a sophisticated profit-sharing arrangement, you will want to understand its financial implications for the party. This template can be an ideal tool to prepare for your negotiations. Knowing the scenarios and designing adequate profit-sharing arrangements that provide the right incentives and align investor interests are prerequisites to making your private equity deals work.
  • Preferred Return Calculations: Profit Sharing Calculations are cumbersome to do. It is much easier to use a profit-sharing plan template. Preferred return calculations are easier to understand in an Excel template.
  • Simplicity: Despite various sophisticated calculation formulas in Excel, our Excel template offers pleasant designs and layouts, aiding in quickly understanding the critical aspects of profit distribution arrangements.
  • Customization: The profit-sharing formula spreadsheet in the Excel model is fully editable and, if needed, can be tailored to your needs. This can be done by either reflecting the assumptions of your deal in the designated assumption areas or changing the calculations further. 
  • Transparency: Enhance trust and openness between GPs and LPs by fully disclosing the underlying calculations used in a profit-sharing agreement and the analysis of the allocated profits to be used. This provides utmost transparency on the applicable formulas and avoids misunderstandings. 
  • Optimization: Experiment with various profit-sharing scenarios to find the most suitable and acceptable terms for both parties when entering a profit-sharing agreement. Compare 1-Tier vs. 4-Tier profit sharing agreements with ease, the implications on their downside risks, and motivation to perform. 
  • Professionalism: Impress your investors with an expert-designed profit-sharing calculation and professional presentation.

The Profit Sharing Distribution Plan Template can make your Deal Work better

At eFinancialModels, we understand that sharing profits is a delicate topic that needs to be analyzed well and negotiated between General and Limited partners to provide appropriate incentives to dedicate time and commitment to managing private equity or real estate investments. In addition, there is also significant downside risk, which needs to be analyzed and understood by all the involved parties. A sophisticated multi-tier profit-sharing distribution template, that provides a variety of profit-sharing examples to explore is paramount in achieving the desired objectives and making an investment partnership between GP and LP work best.

Our state-of-the-art 4-Tier Profit Sharing formula spreadsheet, which models the distribution of profits per a standard Waterfall concept, is meticulously designed to empower investors, private equity fund managers, or representatives to examine better and optimize the profit-sharing arrangement needed for your next transaction. It includes additional features such as a GP catch-up option often used in private equity.

Leverage our already-built profit-sharing plan template to analyze the incentives and motivations included in sophisticated profit sharing-schemes. Improve your financial decision-making by studying the various scenarios and alternatives when designing adequate profit-sharing arrangements using preferred return calculations built into this Excel template.

The model comes as a fully editable Excel file with all formulas disclosed. A FREE PDF Demo version is available as well. Latest model version 2.1

File Types: .xlsx, .pdf

Reviews

  • Works but I would have preferred something easier and cleaner

    Works but I would have preferred something easier and cleaner

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    • Hi Romain, We just updated the Waterfall Profit Distribution Model Template! As you suggested, we cleaned it up and made it more user-friendly. Please feel free to check it out now and let us know what you think!

      413 of 789 people found this review helpful.

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  • Works!

    Works fine!

    Thank you for your feedback.

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