Distribution appears simple in the waterfall model shown in the above post. But it is not always so simple and straight forward, especially when its a retail private equity fund, i.e. a private equity fund with retail investors. With retail investors investing in the fund, the minimum amount that is committed by each investor is less and the number of investors are many. Handing data of so many investors becomes a problem because every information of their late fees, contribution dates, PR to be paid to them based on the date they deposited, etc etc. come into picture.
If the investor had contributed for a draw down later than the due date for that draw down, the interest on his contribution will start accruing from the date that he contributed. So the interest for this one single investor will be different as compared to all other investors. With funds over 200 investors, this becomes a tedious task. Various softwares, websites or huge excel files with numerous sheets are used to capture such data and calculate the distribution amount based on these combinations.
Also for various contributions, the date from when the interest or PR amount will be calculated will be different. So for every investor, interest will be calculated on various contributions for different amounts and different periods. Let us make it simpler with the help of an example.
We will understand this with the help of just one investor
Mr. A commits 200 in fund XYZ.
For the 1st draw down for 30% he contributes 60 on 01 Jan 2011.
For the 2nd draw down that was for 20% he contributes 40 on 01 April 2011.
For the 3rd draw down that was for 40% he contributed 80 on 01 July 2011.
The value of his invested capital (180) became 300 and was all realized on 01 Jan 2013.
If the PR is at 10%, it will be calculated as follows.
PR = 10% of 60 for 2 years + 10% of 40 for 1 year and 9 months and 10% of 80 for 1 and a half year.
It also depends if the cumulative quarterly, half yearly or annually, on how the PR will be calculated.
This was just the PR calculation for one investor. Imagine the calculation of PR for the whole fund. And this is just the second stage of the distribution waterfall.
It also depends on how the funds are invested and are meant to be distributed, for example the funds from 2 draw downs can be invested into 2 different portfolio companies or the 2nd draw down can be a follow up investment into the same portfolio company where the first draw down money was invested. There are also costs associated in it which are over the invested amount and are taken out from the contributed capital. It also depends on the type of distribution, whether it is a case by case (also known as deal by deal) distribution or non deal by deal distribution. We will understand the details of these two types of distributions in detail in further blogs.
If the investor had contributed for a draw down later than the due date for that draw down, the interest on his contribution will start accruing from the date that he contributed. So the interest for this one single investor will be different as compared to all other investors. With funds over 200 investors, this becomes a tedious task. Various softwares, websites or huge excel files with numerous sheets are used to capture such data and calculate the distribution amount based on these combinations.
Also for various contributions, the date from when the interest or PR amount will be calculated will be different. So for every investor, interest will be calculated on various contributions for different amounts and different periods. Let us make it simpler with the help of an example.
We will understand this with the help of just one investor
Mr. A commits 200 in fund XYZ.
For the 1st draw down for 30% he contributes 60 on 01 Jan 2011.
For the 2nd draw down that was for 20% he contributes 40 on 01 April 2011.
For the 3rd draw down that was for 40% he contributed 80 on 01 July 2011.
The value of his invested capital (180) became 300 and was all realized on 01 Jan 2013.
If the PR is at 10%, it will be calculated as follows.
PR = 10% of 60 for 2 years + 10% of 40 for 1 year and 9 months and 10% of 80 for 1 and a half year.
It also depends if the cumulative quarterly, half yearly or annually, on how the PR will be calculated.
This was just the PR calculation for one investor. Imagine the calculation of PR for the whole fund. And this is just the second stage of the distribution waterfall.
It also depends on how the funds are invested and are meant to be distributed, for example the funds from 2 draw downs can be invested into 2 different portfolio companies or the 2nd draw down can be a follow up investment into the same portfolio company where the first draw down money was invested. There are also costs associated in it which are over the invested amount and are taken out from the contributed capital. It also depends on the type of distribution, whether it is a case by case (also known as deal by deal) distribution or non deal by deal distribution. We will understand the details of these two types of distributions in detail in further blogs.
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