Waterfall "straight split" or "even split" after Pref

When trying to accomplish an even split of TOTAL cash flows in a waterfall between the LP and GP, please follow the steps below.

Currently, all of the promotes in our waterfall are IN ADDITION TO any cash flow that is earned by the GP as an equity partner. In other words, the GP is earning promote over ALL cash investors in the project, even if the GP is also a cash investor. This allows the GP to earn promote as well as have the same returns as the investor from cash (read: pari passu)

So, if the GP is putting equity into the project but we need the total cash flows after pref to be 60/40 INCLUDING what the GP is earning on the cash side there is a formula we can use to determine this.

Effectively this calculation is going to determine the amount of dilution needed to get the promote only portion PLUS the GP’s cash investment to equal 40% of the remaining cash flows.

So to clarify, here are the assumptions we will use:

  • 90/10 Equity Contribution from LP and GP respectively
  • After the preferred return, the LP and GP will share ALL cash flows 60/40 to LP and GP respectively

The calculation is pretty simple:

1 - ([LP’s Residual Split] / [LP’s Percentage Equity Contribution]) = GP’s Promote Percentage

So with the above example,

1 - (60% / 90%) = 33.333333%

That means the input for GP’s residual split would be 33.333333%.

As a check, let’s assume a single distribution of $1 million after the pref. Then the GP’s total cash flows to the residual are:

10% of the cash contribution’s 66.666667% = 6.666666667%
GP’s promote of 33.333333%

In total, that will give the GP 40% of the residual cash flows.

10% of the cash contribution’s overall split of 60% = $1m * 66.67% * 10% = $66,667
GP’s Promote of 33.333333% * $1m = 333,333

For a total of $400,000.