From an investor standpoint, the biggest advantage of the European Model is that the General Partner doesn’t get any profits until investor capital, plus their preferred return, is given back. First National Realty Partners is one of the country’s leading private equity commercial real estate investment firms. Another clause that may be outlined in the PPM is the “. Within real estate private equity, there is a common entity structure that seeks to align entrepreneurs and investors: the equity waterfall. For example, a deal may offer Limited Partners a preferred return of 8%, which means that they will receive 100% of the property’s cash available to distribute until they have earned a return of 8% on their investment. Above the hurdle, the manager/General Partner receives 100% of the income and profits until they are “caught up” to their performance fee. GP CATCH-UP: Once a fund has returned all contributions to investors and reached its preferred return, the GP is then able to begin collecting carried interest, which is calculated by going back to the first dollar of profits generated by the fund. 4. The information contained herein is subject to change and is also incomplete. A key driver of this alignment is carried interest, or the performance-based incentive fee that GPs collect, which usually represents 20% of profits generated by a fund. The waterfall difference between operating cash flow and reversion cash flow. PREFERRED RETURN: Investors continue to receive 100% of fund proceeds until the fund has achieved its preferred return, or hurdle rate, as defined in the fund’s offering documents. The American Waterfall model addresses the primary weakness of its European counterpart – that it takes a long time for the General Partner to receive their management fees. Listen to the FNRP's investment committee as they share detailed insights about every new deal. What is better—tiered returns or pari passu? The whole fund waterfall is also the form endorsed by the Institutional Limited Partners Association (“ILPA”) in its Private Equity Principles Version 2.0.1 Why is it called a “waterfall”? In all economic cycles, investors choose real estate to add diversification to their portfolios, and because the assets are income producing, hedge against inflation, and are tangible. This is particularly true in today’s fundraising environment, as robust investor demand for private equity has allowed managers to include less investor-friendly provisions in their terms. finance waterfall private equity pe financial modelling. In an asset class where investors typically expect net performance of around 15%-20%, the preferred return is a critical tool to ensure that managers achieve a prespecified baseline return before they can collect incentive compensation.


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