Waterfalls and Catch-Up’s

August 17, 2021
Waterfalls and catch-ups are common terms when further defining how distribution flows from an investment to the limited partners involved. This is especially important for an investor to understand in order to have clarity on what happens if the opportunity does not perform as well as anticipated. Furthermore, waterfalls and catch-ups demonstrate how the performance fee is dictated towards the managers. Essentially, waterfalls and catch-ups portray the overall risk of the investment opportunity, and how much or how little an investor has to gain financially from the investment opportunity.

Waterfall: When partnering with a sponsor, the waterfall defines how much cash distribution is awarded towards the limited partner and the sponsor. Essentially, the waterfall dictates how much an investor gains financially per private placement opportunity. For example, if a waterfall is an 80/20 split versus a 50/50 split, an investor would have greater opportunity for monetization in the 80/20 split opportunity, having 30% more accessibility in their investment than that of the 50/50 split. Furthermore, the investor is typically awarded a preferred return threshold between 7-10%, depending on the sponsor and opportunity. It’s important to note that the return is not a guaranteed amount, but a ‘preferred’ amount based on performance assumptions for the investment opportunity. The preferred return is typically viewed as an interest rate on invested capital.

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What is Whitestone’s Waterfall Structure?: 
  • Investor Preferred Return

  • Return of Investor Capital

  • 80/20 split

What is a Catch-Up?:

Once the preferred return hurdle is attained, the General Partner may receive all or most of the future profits until the GP catches up to its 20% carry amount (assuming it’s an 80/20 split). Once this is obtained, the profits are split 80% to the LPs and 20% to the GP for its normal carry.

To further illustrate, if the investment returns are an 18% annualized internal rate of return (IRR), the manager will receive 20% of 18% of total annualized profits based upon their full catch-up amount.

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Overall, waterfalls and catch-up clauses help dictate how capital is distributed to an investor and sponsor. At Whitestone & Co, we are committed to investor profitability first, thus offer favorable waterfall terms towards our investors.

To learn more about Waterfalls and Catch-Up’s, please contact Alicia Miller, VP Capital Market at amiller@whitestoneco.com.