Welcome to this video. In this video, I will cover the waterfall section in the ARGUS Excel Model. Waterfall is a terminology of a profit-splitting structure between general partners and limited partners.

Waterfall Assumptions

I am going to say the cash is distributed on a monthly basis. The maximum number of tiers is 5 in the ARGUS Excel Model. If I input 5 tiers, I can see 5 tiers are activated at the bottom. If I change it to 2, only 2 tiers are activated. The preferred return is 8%. Preferred return is similar to the interest on the capital deployed. HC capital contributes 19% of the equity stack and BBT capital contributes the remaining 81%. Both of them will earn an 8% preferred return on their contribution before the return of their capital and the profit distributed through different tiers. The preferred return is accumulative rather than compounding. If a preferred return is missed due to a temporary lack of cash flow. The missed amount will simply be carried forward. For the compounding preferred return, the interest on the missed amount will also need to be paid. If the preferred return is met, then the first tier kicks in. Before the BBT Capital, which is the limited partner, reaches 12% IRR, the cash flow is split 30/70 between the general partner and the limited partner. I can see that HC Capital is being disproportionally rewarded as it contributes 19% of the capital stack but receives 30% of the cash flow over the preferred return. This disproportional reward is also called promote. The waterfall is designed this way to incentivize the general partner to achieve a higher return for the deal. After the BBT Capital reaches 12% IRR, the cash flow will be split 50/50.

Waterfall Cash Flow

Let’s go to the Annual Waterfall tab. I can see how the cash flow is distributed in detail. The preferred return. Return of Capital. The first tier. The second tier. The return summary of HC Capital and BBT Capital. At last, the promote.

Alright, I have completed the waterfall section in the ARGUS Excel Model. Thanks for watching this video. I will see you in the next one.