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Concepts

December 31, 2017

5 min read

Understanding Private Equity Waterfalls, Clawbacks, and Catch-Up Clauses

In private equity, a 'waterfall' refers to the priority sequence in...

In private equity, a 'waterfall' refers to the priority sequence in which profits from an investment are distributed among the general partners (GPs) and limited partners (LPs). It's akin to a multi-tiered waterfall, where the water - the profits in this analogy - cascades down different levels, each representing a phase in the profit distribution process.

Consider an example: A real estate fund acquires a property, invests in improvements, and then sells it at a profit. According to a typical 'European Waterfall' structure, the first tier - the top of our waterfall - ensures the return of the original capital to the LPs. The second tier provides the LPs with their preferred return, a predefined percentage on their initial investment.

Only after these two levels are satisfied does the waterfall flow to the third tier. Here, the remaining profits, often called 'excess profits,' are divided between the LPs and GPs. It's common for this split to favor the GPs, typically around an 80-20 LP-GP ratio, incentivizing fund managers to exceed the preferred return threshold.

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February 14, 2018

4 min read

Real Estate Valuation: Cap Rate and Return on Cost Decoded

While they both provide valuable insights, their application...

As we continue to explore the fascinating realm of real estate investing, we shift our focus today to two crucial metrics used in assessing the value and profitability of real estate investments - Cap Rate and Return on Cost. While they both provide valuable insights, their application and significance can be quite different. Let's untangle these terms and understand how to use them effectively.

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