Structure of a Private Equity Waterfall 🤯
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- Опубликовано: 26 сен 2024
- Ever wonder how Private Equity, Hedge Funds, and Investment Funds structure their returns?
This structure helped me start my first fund at age 22 and is the same structure that other funds use on Wall Street.
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ABOUT BRIDGER PENNINGTON
Bridger Pennington is the founder of 2 investment funds that have done over 217 deals in the last 4 years. Additionally, he currently manages an 8 figure hedge fund Ugly Unicorn and is a strategic advisor to 8 portfolio funds.
He has started helping others launch their own funds through Fund Launch, an online program with over 60,000 students designed to help them start investment funds without working on Wall Street or having an Ivy League degree. Last year they launched 130 student funds, and have 12 student funds over $100 million.
Bridger has spoken on stage to thousands of people across the United States and is determined to help entrepreneurs scale their businesses through launching their own funds.
DISCLAIMER: This is NOT financial or legal advice. Fund Launch’s experiences with using a fund strategy are unique to them. You should not consume this content with the expectation that you will have similar or the same results. All fund projects are subject to multiple variables and risks that make it impossible to predict success. Since we cannot predict success or provide you with information on what an average customer experience is by creating a fund, you should assume you will not have the same type of success or any success at all. We encourage you to seek out advice from other qualified professionals for advice on setting up your particular fund.
Learn More About Bridger & Fund Launch:
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Thank you making the concept so simple and approachable for everyone. And I absolutely love your humility and passion to teach others. This is by far the best channel on this subject!!!!
I appreciate that!
I audit PE companies and I love watching his videos because he does such a great job at explaining complex topics. Great content.
Question: Things cost money. Lawyers, bureaucracy, etc, etc. Where does this come out of? Is it from the general funds as an operating expense? (as opposed to the management fee)
Love your IG Ad's This is so helpful! I am looking to share this with my family so they can get what It is I am running! This is so clear and concise summary for a typical new and complex topic for so many others. Keep It up! By the way love the set up for your videos! If you ever get some time please share how you do your videos! #RootingForUsAll2Win #FundamentalFourBook
Kerry Lee Hartley I appreciate it Kerry!!
DOOOOOP!! Perfect content for a PE aspirants.
This dude is incredible! Great info.
Thank you!
I can’t believe it took me two years to find you but this is the perfect time for me
Thank you for a great content bro. I just want to ask, the assests/ company we acquire need 7-8 years to sell or profit. Then how do we pay our investors/LPs yearly return of maybe 15-20%?
Do they take return after fund matures in 7-8 year?
Glad I found your channel... Going to watch every single video of yours from now on
Brother, I love you for what you're doing. Thank you.
Thank you! I'll keep it coming
Great video. You made the topic so much easier to understand. Could you make a video about rebalancing or equalization in a closed ended fund, especially in a parallel fund structure? I am interested in getting a better understanding of that concept.
This channel is phenomenal
thank you!
Thanks for your valuable contents
Please mention to GPs that they have to disclose ad properly explian the risk to their investors.
Thanks Bridger for the great explanation. Check out our latest video on distribution waterfall calculation - ruclips.net/video/tEt3tINm3Hs/видео.html
Question regarding the profits:
So if you have a fund of 100mm and let's say 10 investors chip in 10mm. Now, a borrower wants to borrow 10mm. 2% fee and 10% ROI for investor.
So, would the pricing be this:
10mm ask/10 investors = 1mm per investor
So each investor would get 10% of 1mm that each investor (100K) would be theoretically chipping in and you get 2% of 10mm asked (200K)?
Thanks Bridger! Great insight. When you say the LP gets 20% or the GP gets x….I want to clarify this is on the gross amount capital in the fund. I’m confused as to whether you mean the ratios are applied to the % gain only or the gross amount in the fund. Thanks!
In general a 50% performance fee over an index benchmark with no catch-up or management fee seems the most fair. The manager only gets paid when they outperform the markets, and they split the excess 50/50. Obviously with a high watermark. Anything else favoring the investors or manager more comes down to what leverage they have in negotiating this deal. Reputable managers and/or manager with good track record can demand more, and wealthy investors can demand more.
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Hey Bridger, thanks for the info.... If a fund was to buy a company and ran this same exact model ( making money on the catch up/carried interest) -- then sell the company 4-5 years later at a 3x return for example -- how would the payout be structured for the GP and LP's on the sale of the business? Hope this example made sense
For clarification:
1. Waterfall kicks in once the fund starts generating actual profit (after all overhead expenses for running the thing have been paid for out of the cash flow. Office expenses, legal, property management, fees, taxes, etc).
2. So now we have a big bucket with profit money in it.
3. The first 8% cut of that bucket goes to the investors.
4. The bucket just got smaller.
5. The second cut (the catch up) from the now smaller bucket goes to the GPs. The bucket just got smaller again.
6. That now even smaller bucket then gets split 80/20.
The calculation for each stage of this is based on the contents of the ever shrinking amount in the bucket.
Remaining question: It may take a while for an enterprise to start showing profit. How does the GP who's doing all the work survive during that time? They have to pay their rent and personal expenses. Is it appropriate to allocate a basic life support salary in the baseline operating expenses?
That said, where does the "Catch Up" go? To the GPs personal checking account or to the operations account of the Fund?
This episode made me so happy.
Thank you so much
Very well explained, Thanks for that ! I have a doubt , May I know what is the difference between carried interest and GP catch up...?
GP catch up is the compensatory benefit to GP and Carry intrest is the portion of residual profit.
@@neomcclay5717 Do u mean, carried interest is similar to incentive fees in hedge funds ??
Would you please show how this model would work with an example deal. Also would love to know how it would look if it was paid in less than an year vs a multi year deal. Thank you for the content!!!
Is this only applicable in trading and private placements. Is this applicable also in Real Estate Development?
Hi, thanks for the informative videos.
Can you please give your input on the following -
Fund Size = 100 Million
AMC = 2%
Hurdle Rate = 10%
Fund Life = 10 Years (Close Ended)
Carried Interest (Performance Fees) = 20%
Now,
Question 1 -
Is AMC Calculated as 2% of 100 Million Flat each year for the 10 years regardless of the Net Asset Value during those 10 Years. Net Asset Value may be affected by Annual Distribution during the fund life and any unrealised profit/losses.
Question 2 -
I Hurdle Rate calculated as cumulative return over 10 years before Carried Interest can be earned by the GP even if distribution starts from Year 6 Onwards and ALL the Principal Capital is returned in Year 6.
Thank you.
Thank you for this video!
How do we join your mastermind group? Im wanting to deploy a hedge fund model using my Series 3 license to be a Commodity pool operator
Hey Andrew, you can join the mastermind here -> www.investmentfundsecrets.com/start-today?sl=yt can't wait to see you inside🔥
Hello Bridger, Just wanted to check who's the administrator of your funds?
Very inspiring, im your new subscriber. Quick question, to any people inspired to start their own fund in the future, at such early stage / young person like you who have no experience or much credentials of investing and investment banking, how do you even persuade investors to invest in your fund / raise capital from them? And who do you go about raising these capital? Do you start out with High net worth individuals first?
Thankyou
How do you calculate returns when the property is not sold for 5 to 10 years later?
Im so happy i found this channel
Thank you! Are you in the process of launching your fund?
i didn't understand the structure i hurd of it before but looking forward to learning it
@@bridger_pennington I am planning on starting my fund when I graduate from my MBA program at Wharton. What size fund would you say it is smart to start buying public companies and making them private?
Hey Bridger thanks for the video, great content !
The return rate you are displaying is annual or based on the exit at year+x ?
Cheers from France.
great content man. keep it up.
Thank you for your great work Bridger. How does the GP create cash flow in the fund without selling the underlying investment? Example: we hold both real estate and businesses, both are 7-10 holds prior to ipo/spin outs etc. Without charging a management fee....how does the GP get paid along the way? Thank you in advance.
in some cases you won't be paid until the properties sell, hence why many funds charge mgmt fees. If you aren't going to charge mgmt fees, most funds do shorter term holds or flips so everyone can be paid faster.
@@bridger_pennington But you said in another video that the management fee is for he advisors of the fund, so not the GP, am I right? So you would still not get paid if you didn't sell the real estate or business
@bridgerpennington awesome video man! Quick question, how does the limited partner only pay 20%? Can you share more on that?
How do you align timelines between investments?
For example 1st guy invested now, 2nd guy in 1 month, 3d guy in 2 months and so on.
When do you officially kickstart your fund? Once you raised predetermined amount of capital (could be that 1st guy invested now and last guy invested 3 months later)?
Lets say you want to raise 100 million and only then start operating. What if you hit the last million 9 months after the 1st guy invested? That means he had his money idle with you for 9 months.
You typically have closings for your fund. For example, if you raised money for 18 months, you'd have 3 closes (one every 6 months). After each close, you can officially start deploying capital
@@bridger_pennington Sure, however lets say you halready have big amount in your first month. And also you see investment opportunity then. You would still have to wait 5 more months (and maybe lose that opportunity) in order to officially deploy the capital?
@@tomjens2046 I need this question answered as well. Did you gain further insights?
Is this fee structure possible for Accredited Investors (net worth > $1M) or only for Qualified Clients (net worth > $2.2M)? Because I am reading that performance fees are not legal unless the client is a Qualified Client.
What course of study does one pursue in college to best set them up to enter PE?
Thanks so much for the info man! Wanted to ask you , if you running a 3 year fund that buying duplexes to rent them and you set your pref/carried/catch percentage.
When the profits going to the lp /gp ? Only after 3 years or yearly? And if yearly how do you know the percentage then?
Does this work for the UK?
I felt that “we didn’t go to Harvard 😂
What software would you recommend for tracking the model you're presenting?
I like your videos mate!
Glad to hear it!
Why don't P.E funds & Hedge funds trade fx, CFDs & indices to boost annual return to a 3/4 digit R.O.I
E.g) make a 150% return in one year, and a 80% on that 150% the following year... continuing the snowball effect
My point is, when u actively trade, u can easily triple/quadruple ur capital within a year
@@talentekhuzwayo2705 they are already doing it bruh
Do you keep the same structure annually or is there an incentive for people to keep their money in your fund?
Investors (LPs) are generally locked in for 10 years (duration of fund life), meaning LPs are required to keep their money in the fund until the fund is liquidated and the proceeds are returned to the LPs.
What is going to happen capital , are you going to return after locking period?
If it isn't deployed then you'll release limited partners or investors from their capital commitment.
Dont put on sub titles.
Can a real estate fund yield 20%+ returns?
What degree do u get for a career like this
2 questions.
Wondering if this can work for my website THRIVEMASTERS.COM as to alight investors?
Second, BRIDGER I would love to have you showcased on out site.
Why listen to you vs. all other talking heads on RUclips? Your story Selling others AUM of $100M funds to lead us to believe you are an expert in this field. SHOW US THE MONEY your personal funds are making as so many are "talking" online to be perceived as expert!
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