PE Bites: Cascading Vs Waterfall: Leverage AI to Do the Work for You

Does your legal entity structure look similar to Figure 1 below? If so, this PE Bite is a must read!

Cascading Cash and Waterfall are terms used in private investing that define how distributions flow from the investment to the partners… and what happens when things don’t go as planned. It’s important to understand how it works, as an unfavorable cascade can significantly impact the risk involved for all parties.

  • Cascading Cash – Usually found in a fund-to-fund type of relationship. Cascading cash consolidates and analyzes all known cashflows, investor details and settle dates associated with transfers, then suggests the most optimal route to move money based on a complex legal entity structure.
  • Waterfall – The waterfall defines the way in which cash distributions (capital gains) will be allocated between the sponsor and the investor previously approved in the Limited Partnership Agreement.

Regardless of the method, the distribution to investors requires approval from multiple departments, triple checking systems for data integrity, and logging into multiple banking portals to facilitate the distribution. This process of properly allocating investor funds through an intricate legal entity structure can take days. Private equity firms today primarily rely on excel to map out this arduous journey which can be error-prone and therefore diminishing investor confidence.

AI and robotic process automation (RPA) has come a long way in a short period of time. By integrating technology into your business plans, firms can generate even more deal flow potential and significantly increase investor confidence. Companies realize incredible value and reduce the impact of reputational risk by leveraging technology to automate this intricate process with a single click of a button, thus freeing the team to spend less time on operational workflow and more on strategic initiatives, which translates into amplified value for your LP’s and GP’s.

Figure 1