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Waterfall - American vs European

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This primer on distribution Waterfalls compares the American style versus the Europeans style used in real estate private equity fund structuring.

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Waterfall - American vs European

  1. 1. Real Estate Private Equity Fund Structuring WATERFALL AMERICAN VS EUROPEAN
  2. 2. ¡  A pre-agreed economic arrangement, the waterfall dictates how distributions are prioritized between a Fund’s general partner or sponsor (GP) and limited partner or investors (LP) ¡  Depending on the performance of an investment, carried interest, or profit participation, entitles the GP of a Fund to receive a share of the Fund’s profit that exceeds the GP’s pro-rata share based solely on capital invested ¡  Generally speaking, waterfall provisions broadly fall into one of two categories: European or American Ploutus Advisors, LLC 1 WATERFALL
  3. 3. ¡  GP receives carried interest once capital contributions and preferred return on realized investments are returned to investors ¡  A deal-by-deal arrangement where carried interest is distributed to the GP on successful investments regardless of losses that may be incurred on subsequent investments ¡  Benefits the GP as investors bear disproportionate share of risk ¡  Used in Funds where necessary to isolate profits and losses on an investment-by-investment basis ¡  May be subject to a Clawback – An adjustment payment made by GP to the Fund for receiving more than its pre- agreed share of Fund proceeds Ploutus Advisors, LLC 2 AMERICAN STYLE WATERFALL
  4. 4. ¡  GP does not receive any carried interest until all capital contributions, for both realized and unrealized investments, plus the full preferred return on aggregate capital contributions are returned to the investors ¡  Also referred to as a Back-End Loaded carried interest structure ¡  No interim carried interest paid to GP on deal-by-deal basis ¡  Rebalances risk Ploutus Advisors, LLC 3 EUROPEAN STYLE WATERFALL
  5. 5. Ploutus Advisors, LLC 4 EXAMPLE Consider two investment projects of $100,000 each. The ratio of development cap rate to market cap rate determines the Sale Proceeds from Liquidation.
  6. 6. Ploutus Advisors, LLC 5 COMPARISON Based on the assumed scenario, excess distribution of $1,428 is paid to the Operating Partner under the American Waterfall versus the European Waterfall
  7. 7. CONTACT Ploutus Advisors, LLC 6 Disclaimer: The information contained herein may be subject to errors, omissions, changes in assumptions and, other factors. We do not provide any guarantees, express or implied, and/or make any representations as to the accuracy of the information contained herein. All information should be independently verified by the user. The analysis represents our interpretation and is NOT intended to replace information received from tax and/or accounting professionals. The user is advised to conduct its own due diligence and consult with its advisors prior to making any decision. To discuss your real estate needs, please contact: Adnan Tapia Email: Tel: +1.424.274.3561 Ploutus Advisors, LLC 1875 Century Park East Suite 700 Century City CA 90067