A page of notes about industry, innovation, disruption, accounting (sometimes) and of course...models.


  • 071 08/21/2017

    I have been working with a friend of mine who prefers to remain anonymous and happens to be a real estate professional to develop a simple real estate distribution waterfall (I will refer to him as Dimitri for the purpose of this post). Our working relationship consists of me interrupting his day with short emails containing Excel templates and bulleted questions, which he graciously responds to with quick answers pulling from years of experience. It’s a highly iterative process that hopefully consumes little of his time.

    Last week we developed a bare bones real estate distribution waterfall that, per his feedback, was as simple as it could be without risking oversimplification: a fine line this website attempts to navigate each time new content is posted.

    I thought I would include the commentary he provided that did not make it into the template as I believe it provides insights that would otherwise be lost. The template referenced in the comments that follow can be downloaded HERE.

    Funds Invested: The distribution waterfall generally does not take into consideration whether or not the sponsor (GP) invested capital. If the sponsor elects to invest capital it is generally invested on the same terms as the LP capital. For this reason the split between LP capital invested and sponsor capital invested is of little significance to the distribution waterfall.

    We decided to keep this feature in the waterfall with the input for percentage of sponsor capital invested set to 0% because the template currently calculates how much the LPs and the sponsor will have to put up in the event of a cash shortfall.

    IRR and MOIC Hurdles: This template focuses on multiple IRR hurdles that define how cash flows are split between the LP and GP. In addition to IRR hurdles, a more advanced distribution waterfall would allow for the measurement of a specific IRR or multiple of invested capital (MOIC) at each hurdle.

    The purpose of including MOIC is to control for time horizon. IRR calculations are sensitive to time horizon and MOIC calculations are not. By including MOIC the LP is protected in two ways:

    • MOIC Provides Short Term Protection: If the sponsor receives an incredible offer months after making the initial acquisition of a property it will result in a high IRR. But it is unlikely that someone would offer a sufficient multiple of invested capital (MOIC) to trigger hurdles more favorable to the GP.
    • IRR Provides Long Term Protection: If the sponsor waits a decade to sell the property, they might achieve a multiple of invested capital what would have been appropriate for a 5-year hold period. On a longer time horizon IRR protects against this discrepancy.


    Concluding Remarks: After several iterations Dimitri finally came around; “I actually really like this. Nice and simple. But I would want more context surrounding the cash flows.” He elaborated in the email that a novice should spend more time understanding the transaction before taking the time to focus on how the proceeds are split between investors and the sponsor behind the deal.

    Fortunately ASM has a template for a multifamily property: LINK.


  • 070 08/17/2017

    We are excited to announce the addition of a new feature: ASM Subscriber Profiles (see image below). Subscribers can now upload examples of their own work and share (or hide) exam results with a public page listing their accomplishments and interests. In addition to uploading unique templates or analysis, we are also encouraging subscribers to upload improvements to ASM templates available on the website. Each time a subscriber uploads an example of their own work, ASM will create a unique page for that post linking back to the subscriber's profile. Ultimately we hope that this will help subscribers get noticed for their talent. The profile page will also track how often a subscriber's work is downloaded and voted as helpful.

    The "Test Scores" featured on the page reflect the outcome of the three final exams available on the Quizzing Dashboard; they do not reflect any of the quiz scores (note: the final exams can be found at the bottom of the Quizzing Dashboard). Test scores will only appear on your dashboard once you attempt the final exams. For example, in the image below you will see that only one score is listed for the "Integrating Financial Statements" exam. Scores for the "Discounted Cash Flow Model" and "Leveraged Buyout Model" exams will not appear until the first attempt. Finally, if you are not pleased with your scores you can select the toggle labeled "Make ASM Tests Public" to hide the result. When this toggle is turned off your profile will appear as though the exams have never been attempted.

    I am including a screen cap of my own profile below as an example (each profile has a public LINK to facilitate sharing as well):


    User Profile for Financial Models

    Click on image for a larger view.

    In the next few weeks we will be rolling out new features that will facilitate searching for analysis and financial models uploaded by ASM users. In the interim please take a moment to familiarize yourself with the feature. Subscribers can access and update their own profiles from the Quizzing Dashboard by selecting My Account > My Profile.



  • 069 07/15/2017

    This post is part of an ongoing effort to cover lower-middle-market private equity transactions for both funds and fundless sponsors. The lower-middle-market is frequently defined as the universe of businesses with $2 million to $10 million of EBITDA, and I have always found it fascinating because it is often where successful founder CEOs interact with private equity firms or fundless sponsors for the first time in an effort to cash out or take their business to the next level.

    This post focuses on a significant tax advantage that any entrepreneur, fundless sponsor and lower-middle-market private equity practitioner should be aware of known as Qualifed Small Business Stock (QSBS). QSBS is an occasionally overlooked section of the U.S. tax code that can result in incredible tax savings on capital gains. If a transaction is structured properly, it has the potential to save shareholders millions of dollars in the event of a successful exit (sale of the company). 

    The attached PDF file provides an explanation of how QSBS works, and details a hypothetical equity structure. The document introduces legal documents relevant in forming a corporation and defining the equity structure of the corporation. The following additional topics are touched on as well:

    1. The Certificate of Incorporation: The legal document relating to the formation of a corporation.
    2. Equity Structure: A hypothetical equity structure is introduced requiring two classes of common stock and one class of preferred stock.
    3. Shares Outstanding: An explanation is provided for the difference between Shares Authorized, Shares Issued and Shares Outstanding.





    Download Paper: Fundless Sponsors & Qualified Small Business Stock: An Incredible IRR Boost

    Related: Fundless Sponsor Economics



Models are:
A) really boring
B) pretty sweet
C) super important
D) somewhat easy
E) kind of hard
F) fun
G) all of the above



*Answers a, b, c, d, e, f and g are all correct.