PEF Services, a fund administrator for Alternative Investment Managers, today has released a new white paper entitled “Distribution Waterfalls: The Definitive Guide for Limited Partners.” Investing is about returns, and, in private equity, how those returns are distributed to investors is dictated by the waterfall provisions of the Limited Partnership Agreement. Until recently, many investors paid less attention to this important calculation than they should, mainly because of the complexity of the calculation and the difficulty in getting enough detailed information to review it for reasonableness.
Drawing on PEF’s extensive fund administration expertise, and knowledge on the subject of distribution waterfalls, this white paper examines the importance of distribution waterfalls, the difference between the European and American models, and the key elements that Limited Partners (LPs) need to understand in order to confidently review waterfall calculations. It covers:
• Why LPs are diving into waterfalls
• Waterfalls 101 and the key components of the waterfall
• European vs American waterfalls methods
• Waterfall trends and variations along with reasonableness checks
• A detailed, downloadable Sample American and European Waterfall Calculations spreadsheet
“The work of industry bodies such as the Institutional Limited Partners Association and the CFA Institute, through Global Investment Performance Standards, is supporting this shift towards more active oversight,” says Anne Anquillare, CFA, CEO and President, PEF Services LLC. “By encouraging greater transparency around investment data, these organisations are helping to give LPs the information they need to understand and monitor the waterfall.”
Despite the challenges, many LPs are taking the plunge and wading deeper into waterfalls in order to understand and project their impact on investment returns. The sense of urgency has been spurred on by recent cases in which high-profile institutional investors failed to recognise and understand performance fees charged by the GP. Across the board, LPs are becoming more rigorous about monitoring their investments and more proactive about raising potential issues with their GPs.
“While the waterfall has often been seen as an impenetrable “black box,” understanding its impact doesn’t have to involve complicated analysis or a complete recalculation,” says Beth Manzi, CPA, Chief Operating Officer, PEF Services LLC. “LPs should be able to understand the two main waterfall methods, recognise the key elements, and conduct reasonableness checks to help ensure that they protect investment returns and identify potential issues.”
This paper provides Limited Partners and General Partners with the knowledge and tools needed to confidently assess the impact of waterfalls on their investment returns.
This white paper is the latest in a series in support of PEF’s commitment to deliver valuable thought leadership content.