Note: Excel file available for download at the bottom of this post.
Distribution waterfalls define the economic relationship between the equity participants involved in an investment. In private equity transactions this generally focuses on the relationship between the general partner (“GP”) and limited partners (“LP”). If these terms are unfamiliar to you, think of the general partner as the private equity fund, and the limited partners as all of the investors participating in the fund. In this context, the purpose of a distribution waterfall is to prioritize the distribution of cash flows between the investors and private equity fund managers.
Investing is unusual in that the greatest enjoy writing about their profession. I would skip the textbooks and read the investor letters, memos and books that these individuals write.
Context: I recently received a message from a subscriber asking if I could explain the CAGR formula. He said that he had used it in one of his models, and when he looked it up online there was no explanation for the math. His response: “Welp, if you say so formula…” So I thought I would take a moment to explain the formula.
We are in the process of developing the next collection of videos and models for the Leveraged Buyout Model series. This new collection will cover the following topics:
In early 2016 a professor of finance at Texas A&M University-Commerce used ASimpleModel.com to introduce 120 graduate students to financial modeling. At the conclusion of the class he required each student to write a review of the website. Positive or negative, it did not matter, students were free to respond openly.