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Hello Spencer,
Based on the equity waterfalls we have seen; I’m trying to model a partnership in which the two partners contribute in different times (one puts the money the first month and the other several months later) and there is no promotion. The partner that contributed first requests that the distribution is made so the final IRR of the two is the same. The problem I’m encountering is that I don’t have a target IRR to which catch up (the IRR is a result of). How could I model this?
On the other hand, the IRR catch up we have seen distorts the partnership % so the resulting EMx of the two partners differ greatly.
Is it possible not only to equal the resulting IRR but also the EMx of the two partners?Thanks,
Juan Sosa
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Hi Juan,
This is a really interesting modeling challenge – we’ll likely have to go back and forth a bit to accomplish it.
First to answer your question, if the partners are contributing at different times, due to time value of money reasons I can’t think of how the IRR and EMx would be the same. Because the partners are contributing at different times, the amount of distributions to each partner would have to be different in order to hit the same IRR, resulting in differing EMx. Or in reverse, to distribute in such a way to hit the same EMx, the IRR would be different. But without the contributions and distributions being pro rata and pari passu, it would be impossible to match EMx and IRR.
Just thinking out loud, one solution would be to begin analysis when the latter partner first contributes. The former partner would have some accrued contributions (and pref) that would hit at analysis start, and then the partners would contribute pro rata and pari passu from that point, resulting in the same IRR and EMx from that analysis start date.
Perhaps if you want to send me the exact partnership terms that you’re trying to model, I could offer more feedback. If you want to keep the details confidential, send the details to [email protected].
Best,
Spencer
Thanks Spencer!
I’ve been thinking and working on it. Give me some days and I’ll post back with some progress.
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