Waterfall Distribution Automation is a Reality

By: Manuel Villavicencio

Consulting Director

In the world of Private Equity, distribution waterfalls define the economic relationship between the private equity fund managers (GP) and the investors (LP). It is the fundamental thread that bridges the entire profit cycle of the private equity fund together and, therefore, the most crucial component that a PE fund looks at in terms of accounting.

The main challenge is that the formula behind the waterfall calculation differs among funds and sometimes even investors within the same fund. These multiple customized LP agreements create an eye-watering complexity that sometimes leads to errors and enormous headaches for fund managers when tracking manually.

It is this non-standardization that makes automation of carry calculations incredibly complicated, resulting in manual workarounds that significantly increase the chances of human error.

Let’s talk waterfall automation

For many PE Funds, the complex formula behind distribution waterfalls is too big a hurdle to overcome and, therefore, many won’t even consider automation. They have devised accounting methodologies using Excel that give them the flexibility they need, so why change?

It’s true, the intricacy and individuality of each LP agreement is an issue. Many of the ‘out-of-box solutions’ currently in the marketplace don’t have the flexibility to cope with these complexities, forcing PE Funds into an unsuitable workflow.

PE Funds need a configurable, automated solution that can cope with dynamic calculations for different workflows that will create a risk-averse process and eliminate the need for cumbersome spreadsheets.

Allvue’s waterfall automation

As we’ve already discussed, many of the current out-of-box solutions lack configurability. Hence, clients have to shoehorn themselves into pre-defined workflows, which forces them to become developers, having to build algorithms from scratch. Plus, with no ability to query, they have to work with imported files, which then have to be adapted to fit the solution.

Allvue’s solution to the waterfall distribution is unique because it does not follow this approach.

Far from being left to your own devices, our teams work closely with you to implement your waterfall within our fund accounting software framework. Therefore, any workflow can be accommodated within our proprietary technology.

The real game-changer is the form designer, which auto-generates code that turns an Excel form into a dynamic one. Fitting your workflows into a dynamic template then feeds a portal that you can log into to run your report based on the data you select.

It’s time to work smarter

Finally, true distribution waterfall automation is a reality.

Not only will PE funds benefit from faster, more reliable and accurate workflows, they will also reduce risk and operational expenses while enjoying simplified scalability.

It’s time to move away from manual processing and workarounds and embrace the benefits and cost savings of automating waterfall calculation processing.