First thing first, what do you know about waterfall profit distribution? You may have heard of it often used in Private Equity investing and commercial real estate. A distribution waterfall is a method of profit distribution where the capital gains are allocated between the participants in an investment in a “waterfall” manner. This means that usually, the general partners receive a disproportionately larger share of the total earnings relative to their initial investment once the process of allocation is complete. Basically, this method is used to give incentive to the general partners to further maximize profitability.

It is called a “waterfall” due to the nature of its structure which contains consecutive phases of allocation method. If you compare the round of allocation as a bucket, when the bucket is full, the capital is then allocated to the next round of bucket. As you already know, the usual way of allocation of funds is to distribute it across the partners of the funds which include both the general partners and the limited partners. The general partner will keep his own allocation but the amount distributed to each limited partner will have to go through the waterfall method and be redistributed between the general partner again and the limited partners. Therefore, this method is highly advantageous to the general partner resulting with him wanting to maximize the return of the fund to further get more benefits.

To ensure that everything gets properly allocated and managed, creating a waterfall model is very important as well as useful. But since this method is very complex, most of the times, you will need a professional’s help to build a model for you. However, there are also ready-made tools or waterfall model examples that they can use as a template and then forward to a professional for a second opinion to ensure if the model makes sense or working properly.

If you’re looking for waterfall model example or financial models using the waterfall profit distribution method, you can get them here: Waterfall Modeling Templates. You can also download industry-specific financial model templates for different use cases there at eFinancialModels, a marketplace platform that offers financial model templates as well as custom model services and assistance with financial modeling tasks.


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