Proceeds and distributions are important building blocks of a fund model:
- Proceeds are the cash or other assets that a fund receives from an investment.
- Distributions are the cash or other assets that are paid out to investors in the fund.
The right way to model them can vary by the type of the fund.
- Standard closed-end venture fund you will model the exits (and writeoffs) from the investments and when they happen, using an assumption of holding period(s) from initial investment.
If there are follow-ons, be sure to account for the total investment in the company at the exit. For more advanced portfolio construction approaches, you will assume multiple holding periods to account for different type of exits (early, small, unicorn, long, etc.)
- Revenue-sharing funds will have to model recurring revenue share payments from companies, and optionally any proceeds from exits
- Venture Debt funds will have to model recurring principal and interest payments to pay off the debt, and optionally any proceeds from exits from warrant coverage
- Crypto funds investing in tokens or token warrants will have to model any investments into token warrants or tokens, as well as proceeds from sale of tokens. The increased liquidity of tokens can mechanically be modeled the same way as a revenue-sharing or debt fund, with assumptions for amounts over time.
The role of a fund waterfall
The fund waterfall details how the proceeds to the fund are distributed to the investors and operators of the fund.
- Proceeds come into fund
- Minus recycling of proceeds (optional, dependent on LPA)
- Distributions from the fund paid to limited partners and general partners
Distributions will be broken out by the the return of capital invested by LPs and any additional distributions to LPs, minus paying carry to GPs.
There are different ways in which a waterfall can be structured in the fund legal documents:
- In a total fund (or “European”) waterfall approach, the fund is required to return all of the called capital to-date before being able to share in the distributions through carried interest payments
- In a deal-by-deal (or “American”) waterfall approach, the fund is required to return the cost basis of an investment (invested capital plus imputed fund fees) before sharing in the distribution on that investment. This allows fund managers to participate in distributions earlier than a total fund approach
“Clawbacks” are structured so that if later investments fail to return capital, then the carried interest paid to GPs will be returned to the fund
So while the carried interest on each deal is different for an American waterfall, and the timing of carried interest is different, the total carry is the same for a European and American waterfall
SPVs are different in that each investment entity is separate, and the participating LPs may vary, so in modeling an aggregation of SPVs there is no clawback to include
Fund waterfalls are covered in detail at Fund Waterfalls .