Use the Custom Template to perform pro-rata calculations or scenarios not otherwise covered by the other templates

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1 Waterfalls 202 Template Explanation and Rules Calculations (Updated 05/10/2018) The IMS Waterfall Module provides a powerful tool for users to apply simple to complex calculations found in Private Equity transactions in a consistent manner without worrying about burdensome Excel files that can add risk to your organization if not maintained properly. This section will run through each of the Rule Templates that the system provides and items you need to consider when setting up your Waterfall. The IMS Waterfall module currently has eight (8) predefined templates that users can pick from when setting up waterfalls. A summary of these templates and description are found below: Template Name Catch Up Custom Fee IRR Preferred Return Return of Capital Splits Splits with Hurdles General Description The Catch Up Template is designed to allow you to direct cash flow to a specific class in an amount that is based on a % that another class has already received. Use the Custom Template to perform pro-rata calculations or scenarios not otherwise covered by the other templates The Fee template is designed to facilitate any type of Fee such as an Acquisition Fee or Asset Management fee due from investors in the deal or to facilitate Tax Withholdings The IRR Template allows the user to direct distributions to a particular class until it receives a specified IRR The preferred return template allows the user to calculate the amount owed to investors entitled to a specified rate The Return of Capital template provides a means for paying back capital with available distributions The Splits template allows the user to split distribution dollars between multiple classes at varying percentages The Splits with Hurdles template allows the user to split distribution dollars between multiple classes at varying percentages until one or more hurdles impacting one of the classes occurs Catch Up Template The Catch Up Template is commonly used where a Managing Member Class or GP Class is entitled to receive funds from the general Members or LP s in the Project after those members have received a predetermined amount of cash which can be one stream such as their preferred return, or multiple including up to all distribution amounts. 1

2 Pre-Conditions for use: Must have at least two distinct Classes in the Entity to build The screen shot below shows the template and the five (5) mandatory fields and one optional field to complete. The input fields are: Class to receive: Pick the class that will receive the dollars generated by this rule. You can pick more than one class if you have three or more classes in your project Percent (%): Input the percent that the Class is entitled to receive Bucket (as a): Select from the drop down the most appropriate bucket that describes what this cash is to be attributed to (often Promote or Excess Cash) Of Class: Select the class that you need to evaluate to base your Catch Up Select Distribution Sub-Type: Select the bucket(s) that contain the cash flow you need to base your percentage on. You can select more than one up to all options if the Catch Up is based on all Distributed Cash Flow. Gross up the cashflow for total amount to be split: This is an optional check box that will drive how the Catch up is calculated. A sample follows and is available for reference in the application by selecting the?. Gross Up Example Waterfall Investor invests $100,000 Rule 1: Investor is entitled to an 8% Preferred Return Rate Rule 2: Sponsor is entitled to a 20% Catch up 2

3 Distribution Rule 1: Let s say the Investor receives $8,000 of Preferred Return as stated in Rule 1. Rule 2: If the checkbox is not selected: The calculations will not include the cashflow from this rule. In this example the Sponsor would then receive the following: $1,600 (20% of $8,000) If the checkbox is selected: The calculations will include the cashflow from this rule. In this example the Sponsor would then receive the following: $2,000 (20% x ($8,000 + $2,000)) Custom Template The Custom Template is the primary template to use for a simple Pro-Rata calculation and may be used for other one off calculations that are not covered by other templates which is rare. Pre-Conditions for use: None The screen shot below shows a typical pro-rata calculation template and the seven (7) mandatory fields that must be input: Custom Template input fields: Distribute/Withhold: Pick Distribute if you are distributing cash or Withhold if you are withholding cash. In most cases the user will be selecting Distribute 3

4 Amount/Percent: Input the % or a whole dollar amount you are distributing or withholding of the available cash to distribute. This is typically a % for pro-rata calculations and this input should not be confused for the actual total dollars in your batch amount Percent / Dollar drop down: Select the applicable value, typically Percent Source of cash to apply the preceding variables to: Remaining Distribution: the amount left to distribute after any prior rules have completed Remaining Capital Contribution: (Total Invested Amount Return of Capital to Date) Preferred Return: the amount of any accrued Preferred Returns outstanding Amount to Meet Target IRR: the amount needed to reach a pre-determined IRR this should generally be covered under the IRR Template Class(es): Select the class or classes that you want to distribute funds to. If you pick multiple classes, the money will be distributed based on each investors ownership in the Entity, not their respective class. Distribution Allocation Method: select Pro-rata, Equal Distributions if everyone receives the exact same amount (one off) or Total Amount Distribution Sub-Type: select the bucket that you want this cash allocated to. Typically, Excess Cash for a simple pro-rata distribution IRR Template The Internal Rate of Return or IRR template is designed to direct cash flow to one or more classes until each Investment in such class has received an IRR of a specified percentage. The IMS system uses XIRR in this calculation which mirrors the calculation you would receive in Excel using the XIRR function. The common use case for this rule is to drive 100% of the available cash to a particular class until the IRR Hurdle is met. In scenarios where you need to split cash between classes until an IRR Hurdle, you will want to defer to the Splits with Hurdles template. Pre-Conditions for using: The Project must have at least two classes in the Entity you are using this template for The screen shot below shows a typical IRR template completed: 4

5 The IRR template has three required fields that must be completed: Distribute to Class(es): Pick the class or classes you wish to distribute funds until an IRR hurdle is met. Keep in mind this is calculated at the Investment level and if you pick multiple classes, all investors must reach the hurdle before you will move to the next rule IRR Hurdle: Input the % IRR target that you need to reach before moving to the next rule. Distribution Sub-Type: Select the bucket you want the associated cash to be placed in, typically Excess Cash. Preferred Return Template The Preferred Return template is designed to calculate preferred returns due to investors of one or more classes in a Project at a rate set for that class. By default, the system calculates Preferred Returns at an Investment level and assumes the individual Investment Date when accruing. The system provides powerful flexibility around day counts, compounding, and overrides which are discussed below. All distributions derived from this rule will be placed into the Preferred Return bucket to ensure consistency and accurate calculations on a go-forward basis. Preconditions for Use: The Entity must have one or more Classes that have a Preferred Return Rate Populated (see Class Preferences). If a Preferred Return Rate is not populated, you will not be able to pick the preferred Return Template. The screen shot below shows a Preferred Return template with one (1) required field and five (5) optional fields to complete setup: 5

6 Fields to Input: Classes: This is the only required field for the Preferred Return Template. You can select more than one if both classes are equal in priority for payment. If they are not, you will want to setup separate Preferred Return Rules in the order that matches the class priority. Calculations Start Date Override: The IMS system defaults to Investment Date for the start date on Preferred Return accruals. There are several instances where an override may be appropriate as listed below: Investment Dates through the system reflect the date an investor signed, but the actual project does not accrue pref until closing a short time thereafter. In this case, you would want to use an override date that matches the closing date for your project. Development project where investors do not accrue pref for the first six months or some other predetermined construction timeline You have a rate step in the future that needs to be accounted for in conjunction with a basepoint that will be discussed later in this document Day Count Convention: This drive how the preferred return accrual will be calculated. If you select nothing, the system will default to Actual/Actual. The system will support Actual/Actual, Actual/365, Actual/360 and 30/360. Please see your operating agreement to determine if you need to make a selection other than Actual/Actual. Compounding: Some operating agreements may require compounding on unpaid preferred returns. If you select the Add Compounding check box, you will need to input the following: Frequency: Daily, Monthly, End of Month, Quarterly, Annually. Select the frequency of compounding that matches your operating agreement if applicable. Compounding Begin Date: Input the date you want compounding to begin accruing based on your operating agreement if applicable. Return of Capital Template The Return of Capital template is designed to direct distribution cash to the return of capital bucket for one or more classes. Preconditions for use: None The screenshot below shows the two required fields for input to utilize the template: 6

7 Fields to input: Classes: Select one or more classes that you want to direct distribution cash flow to. If you are selecting more than one, ensure they are pari-passu in rights. If one class needs priority over another, setup two different rules (i.e. LP investors are paid back before GP Class members would require two rules). Distribution Method: select Prorata (most common), Equal Amounts, or Total Amount Splits Template The Splits Template allows users to split the available cash flow to two or more classes at different percentages. Use this template if you are splitting all remaining cash flow in a distribution batch that is not subject to hurdles and further splits. This template is often the last rule in a waterfall that is into a promote scenario where sponsorship is sharing a disproportionate share of cash based on previously met hurdles. Preconditions for using: The Entity must have two or more classes to split the cash flow The screen shot below shows a completed Split Template with eight (8) required fields (4 per class) which will increase if you are splitting between more than two classes. Fields to input: Percentage: Input the % of the available cash that will be directed to the first class Class: Select the class that the % just input will correspond to Distribution Method: Select Prorata (most common), Equal Amount, or Total Amount 7

8 Distribution Sub-Type: Select the bucket that best represents the cash flow (typically Excess Cash or Promote) Repeat input for each class that you need to split the cash flow between. If you have more than two classes to split cash between, select the + button at the bottom left and additional inputs will appear. Your percentage inputs must add up to 100% in order for you to save. Splits with Hurdles The Splits with Hurdles Template allows users to split distribution cash flow similar to the Split Template, but now adding in a hurdle rate to end the rule. The IMS system currently supports hurdles based on IRR, Equity Multiple, Return of Capital, and Preferred Return. The system will support multiple hurdles such as an IRR of 15% and an Equity Multiple of 1.80x. Preconditions for use: The Entity must have at least two Classes to split distribution cash flow Fields to input: Percentage: Input the % of the available cash that will be directed to the first class Class: Select the class that the % just input will correspond to Distribution Method: Select Prorata (most common), Equal Amount, or Total Amount 8

9 Distribution Sub-Type: Select the bucket that best represents the cash flow (typically Excess Cash or Promote) Assign Hurdle to Class: Select the Class that will need to hit the hurdle before ending the rule Hurdle: Select the appropriate Hurdle, IRR, Equity Multiple, Preferred Return, Return of Capital as applicable Hurdle Rate: Input the applicable hurdle expressed as a percentage Similar to the Splits Template without hurdles, you can add additional classes to the template by selecting the + button below the splits. You can also have multiple hurdles if you select the plus button. Typical combinations include an IRR Hurdle and Equity Multiple. Once the Class that the Hurdle is tied to has met the required threshold, the system will go on to the next rule. 9