IRR Vs Cash on Cash Hurdles for Equity

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by a searcher
in San Francisco, CA, USA

8yrs ago

IRR Vs Cash on Cash Hurdles for Equity

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 8yrs ago
from University of Kentucky in Houston, TX, USA

Hi Arun: I am seeing a combination for deals that take a long-term view -- a base hurdle between 8-10% compounded annually for the life of the investment, and then the hurdles are based on cash-on-cash. Hope this helps. All the best!

reply by a searcher 8yrs ago
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!