The purpose of this model is to increase the investors confidence by configuring their return value prior to the sponsor participating in profit share. The investor typically contributes more capital into a joint venture, therefore, the summary and visuals computed using this model will be valuable to have at the start of the project when determining the details of a joint venture.
This model includes final IRR and equity multiple and encompasses a ten-year period.
The first computation of the model is to determine the preferred return value for the investor. This value is based on the investor’s total equity contribution for that year. One dynamic aspect of the model is the ability to add shortfalls to the investor’s equity. Users can toggle to reset years completely so that shortfalls are not accounted for as well.
Following the calculation of preferred return, the remaining cash is distributed to sponsors and investors based on their profit share. Sometimes, the profit share may not be based on relative contributions, known as pari passu, therefore, a second set of inputs is used to determine profit share between the investor and sponsor. The final cash flow is added to each party based on those percentages which are applied to the remaining cash.
Additionally, there is a set of inputs that define the percentage of project-level contributions (investor vs. sponsor). A secondary reference was added in case the venture is any other deal than pari passu.
Finally, to determine if each party will break even, as well as determine each party’s final internal rate of return, a cumulative cash position summary was incorporated. Visuals included show cash flow to each party per annum and cumulative cash flow of each party.
Users will input project level contributions and distributions, enter equity contribution percentages for the sponsor and investor, denote post preferred return percentages for sponsor/investor, and enter preferred return. Cash flows then populate. This model is user friendly, as all cells to be edited by the user are color-coded.
Note: I am not a financial advisor and this is not financial advice. Use this template at your own risk.