IRR Vs Cash on Cash Hurdles for Equity

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September 22, 2017

by a searcher in San Francisco, CA, USA

How practical (or commonplace) is it to structure the search fund principals’ equity based on cash on cash return as against IRR hurdles? I think this aligns the incentives much better instead of IRR hurdles (I would want to exit sooner with an IRR option relative to cash on cash option).

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Reply by a searcher
from University of Kentucky in Houston, TX, USA
Also, what David above is saying is what @Tom Matlock has written elsewhere. But, in the market, most of the co-investments from non-search fund institutional investors are doing hurdle waterfalls based on a combination IRR and cash-on-cash as opposed to doing IRR hurdles during the first few years, and then cash-on-cash in the later year. All the best!
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Reply by a searcher
from Babson College in Boston, MA, USA
I am not a certainly no expert at this, but I would hope that your interests and those of your LPs are aligned. I would think that you can "mix and match" and negotiate your structure to include IRR hurdles for the first few years and cash on cash returns in the outer years.
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