fundManageR Cash Flow Waterfall Hypothetical Facebook Seed Investment

Waterfall Structure and Equity Splits.

Given it’s successful history investing in start-ups Founders Fund [the General Partner] is able to raise a separate account for this once in a lifetime investment with a pension fund [the Limited Partner]. The parties agree principals of Founders Fund will contribute 5% of the required capital and the limited partner will invest the remainder. The parties agree to a promote structure that goes as follows:

1. Parri-passu return of invested capital
2. 20% promote after 3x distribution on invested capital
3. 40% promote after a 5x distribution on invested capital
4. 60% promote after a 10x distribution on invested capital
5. 75% promote after a 100x distribution on invested capital.

Please note that his promote structure is EXTREMELY unlikely as very few limited partners would likely agree to such manager friendly economics, not to mention the difficulty in tracking and calculating such a waterfall. This structure was selected purely to demonstrate fundmanageR's ability to handle the most complicated of waterfall calculations.

waterfall <-
  c("20 over a 3x", '40 over a 5x', "60 over a 10x", '75 over 100x')

promote_df <- 
  waterfall %>% 
  get_data_promote_structure()

Initial Public Offering Liquidation Event

A few years pass and Facebook executes on its business plan, they are ready to take the next step and prepare for an Initial Public Offering. The company is taken public on May 15th 2012. After a 180 day lock-up period Founders Fund is able to sell its shares. In order to realize some promote and generate proceeds to invest in other assets Founders Fund decides to sell 660,774 shares on the open market at $25 per share.

ipo_sale_price <-
  25

ipo_sale_shares <-
  661196

lockup_period <-
  180

ipo_sale_date <-
  ("2012-05-18" %>% ymd) + lockup_period + 1


ipo_proceeds <-
  calculate_share_proceeds(price = ipo_sale_price, shares = ipo_sale_shares)

Final Liquidation Event

Most fund vehicles have pre-determined lifespans, with mechanisms to modify their original intended life. These lifespans, depending on the asset class, generally range from 5 to 25 years. For the purpose of this exercise lets assume that this Facebook fund has a fund life not to exceed 11 years, meaning the vehicle must be wound down before June 1st, 2017. As such, and with Facebook stock at all-time highs, Founders Fund decides to liquidate it’s remaining 1,000,000 shares On September 19th, 2016 at $128.98 per share.

final_sale_price <-
  128.98

final_shares <-
  1000000

final_sale_date <-
  "2016-09-19" %>% ymd

final_sale_proceeds <-
  calculate_share_proceeds(price = final_sale_price, shares = final_shares)

Final Investment Analysis

Now given this set of assumptions what were the returns for this investment, how were the economics split between the Manager/General Partner and the Limited Partner, fundManageR can tell you! The first thing we need to do is generate the cash flow time series for this investment.

capital_event_dates <-
  c(investment_date, ipo_sale_date, final_sale_date)

capital_event_values <-
  c(-investment,  # this is negative because investments are considered cash-in
    ipo_proceeds, 
    final_sale_proceeds) %>%
  currency

cash_flow_df <-
  data_frame(dateCapitalEvent = capital_event_dates,
             amountContributionDistribution = capital_event_values)

Now we are ready to feed the necessary inputs to fundManageR’s calculate_cash_flow_waterfall_partnership function which will perform the requisite waterfall calculations and return a nested list of data frames summarizing: 1. Partnership Cash Flow by Period [cashflowWaterfall] 2. Waterfall by Tier and Period [entityWaterfall] 3. Summarised Partnership Total Returns [partnershipReturns]

fb_investment_data <-
  calculate_cash_flow_waterfall_partnership(
    dates = cash_flow_df$dateCapitalEvent, # vector of dates
    cash_flows = cash_flow_df$amountContributionDistribution, # vector of cash flows
    working_capital = 0, # amount of minimum cash
    promote_structure = waterfall,  # promote
    general_partner_pct = .05, #GP portion
    assign_to_environment = T, # create
    gp_promote_share = 1, #share of promote to GP
    remove_zero_cols = T, # remove zeroed out columns
  )

## Cash Flow Produces a 8672.67%% irr
## From 2006-06-01 to 2016-09-19
## Profit of $145,009,900.00
## Capital Multiple of 291.020

## Cash Flow Produces a 15452.32%% irr
## From 2006-06-01 to 2016-09-19
## Profit of $91,787,757.08
## Capital Multiple of 3672.510

## Cash Flow Produces a 6951.64%% irr
## From 2006-06-01 to 2016-09-19
## Profit of $53,222,142.92
## Capital Multiple of 113.047

Partnership Cash Flow Waterfall by Period

Waterfall by Tier and Period

Summarised Partnership Total Returns

Parting Notes

There you have it, you have a full waterfall calculation process for this hypothetical Facebook investment for an extremely complicated promote structure. You can use this function to calculate any form of a waterfall for any given set of capital multiple or internal rate of return hurdle hurdles. An example of an IRR based waterfall will be coming soon.