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Waterfall Distribution Models: Effective Data Decisions & Automation for Private Equity and Real Estate Firms

by - ThoughtFocus | May 4, 2023 |

Investors and owners of private equity funds, real estate, credit, fund of funds, or investment insurance -all look to grow their asset value and expect a higher return of value from their investments. Waterfall distribution is a method that allows for dividing up such investment profits or capital gains among a group or pooled investment participants. The distribution waterfall establishes the hierarchy by which payouts are given to limited partners (LP) and a general partner (GP).



Waterfall Model Distribution – How It Comes Into Picture? How Does It Work?
Imagine if investors fund 100 million in investments, the portfolio management companies or fund managers may give investors 120 million with a 20% return. The profit earned is first ascertained via partnership accounting and cash flow information coming from subledger systems. But before comes the income calculations – figuring out and arriving at the appropriate internal rate of return (IRR) value and this is where the waterfall distribution model comes into the picture.


When portfolio companies sell some assets, the waterfall model allows them to compute and ascertain what the distributions will be when giving back the returns to investors and partners.



Challenges In Waterfall Model Fund Calculations For Investors- Key Elements To Consider

  • Considering the complexities involved in the ROI calculations – there is a complex way each limited partner manages what their IRR is by the expectation of what they will return.
  • Varying ROI percentages brings complexities and challenges in fund calculations. While most investment companies are either asking their fund administrators to do the calculation for them, or they are doing it in-house in Excel with a bit of finetuning and coding added to it.
  • The problem persists- Even if a fund administrator does the calculation, the investment firms need to verify the info provided by the fund administrator is factual and correct.
  • Imagine a company managing 40 to 50 billion in management and doing a small portion of their waterfall calculations through their sub-ledger fund accounting solution providers, who do a bit of coding and just finetune the Excel sheets (low automation) otherwise much of their work is done from outside causing discrepancies and problems with data.
  • Added, the most precarious part remains in ‘scenario modeling.’ When doing fund splits, think of scenarios like market crashes, dooms day, war, or another covid situation and the market coming to a grounding halt- we need to take those scenarios into consideration accurately.
  • Today, the simpler fund distribution calculations are done in Excel, the complex ones are either given to fund administrators or to bigger global hedge fund administrators to manage, and there are hybrid systems where investors are giving it out, but they need to do the ‘shadow accounting’ checking for errors.
  • Remember, it is also about investors reinvesting their money back in the fund. Fund management companies would like to see a ‘capital call’ asking for more money coming in from their investors. The distribution changes if the investor invests back for reuse, enhancing the investment scope- and all these are typically done in Excel and tediously saved in folders.



ThoughtFocus Waterfall distribution solutions provide technology power – automation, data science, highly-visual data intelligence, and insights to investors
Investor firms just like in any other industry are jostling, trying to make sense of data, and are looking for highly visual, actionable insights to make smart investment choices and decisions. Here, the velocity of processing, cleansing, sorting, and streamlining the vast unstructured/semi-structured data holds the key. ThoughtFocus, as a portfolio management and technology solutions company, has been serving many of its global investment and asset management clients by delivering greater value and returns through its technology prowess and deep domain expertise.


Intelligent Automation –When required, the system automates processes with RPA and Intelligent automation, freeing up space for fund managers to focus more on fund analytics and critical scenarios. 


Data Science – ThoughtFocus’ Data Engineering, AI, ML, and advanced analytics technologies process cleanses, sorts out, and streamlines unstructured and semi-structured data coming from various sub-ledgers and accounting systems maintaining data uniformity. Further, our data governance support and highly customized visual analytics and intelligence (Tableau/Power BI tools) are provided via interactive dashboards, giving an edge to multi-billion-dollar investor companies, powered by our scalable waterfall model engines, accelerators, and IPs. It all helps companies make better decisions and intelligent predictions and gain better data-driven insights.


We use various innovative data mining tools, processes, and techniques like regression (predictive engine), clustering analysis, anomaly/outlier detection, classification analysis, and association rule learning to make sense of the data and even identify various identical, and even dissimilar patterns from large data.



ThoughtFocus’ simplified, highly integrated, and scalable Waterfall distribution model solution
Imagine a complex robust system working tirelessly relying heavily on Excel and fund administrators for fund calculations and to predict outlier scenarios, and now! imagine a different scenario where an innovative system, with just a click of a button investors, can get a picture of all the possible scenarios like, what are the deals that are getting affected by various scenarios (like liquidations) and the corrective steps investors should be taking, etc.




ThoughtFocus’ Waterfall Model Solutions bring significant ROI to your business. 


With all transactions and the cashflows coming in from the systems, we deploy a waterfall engine on top of the cashflows, and we also ride back when we have the distributions ready, to where the money is going. In this case, we do not have to retype that into the system, we are creating the transactions and running it back.


Here, ThoughtFocus solutions clearly distinguish themselves from competitors. Our solutions have been impacting and resonating aloud as to who we are and why we are such a niche vendor that investors are compelled to do business with us, not just with waterfall distribution solutions but also with other solutions too. We thoroughly understand the nuisances and working of private equity, real estate, and credit investment strategies and we have the perfect solution suite, domain experts, and technical prowess that solve your various investment and ROI challenges.


Case in point- A relevant example is the waterfall distribution model solution from ThoughtFocus which eliminated the redundancy of manual entry of cashflow entries in Excel and maintenance of large sub-ledger folders – which proved cumbersome for the client. ThoughtFocus built a futuristic architectural solution on open stack technology, seamlessly incorporated, and integrated it into the client systems. It is easy to use and scalable, enabling seamless funds consolidation, and bringing significant ROI.


  1. ThoughtFocus’ powerful IPs, AI-based solutions, and accelerators can speed up project and solution delivery. Our solutions save investors immense time, effort, and cost, making systems far more efficient.
  2. Our Master Data Management (MDM) and data governance systems and solutions (in partnership with Ataccama) ensure clean sanitized data which is managed centrally while maintaining data accountability and providing accurate data results.
  3. There is also an audit risk and compliance component augmented in our solution delivery.
  4. Lastly, our integration tools- waterfall distribution models are run in connected environments; typically, the waterfall engine runs on top of transactions that come from the investing companies’ sub-ledgers.


ThoughtFocus has vast experience in building complete waterfall model solution architectures, has immense knowledge and expertise doing this in-house, and integrates all that with the tools you have.


If you’re a Private Equity, an alternative investment, or a real estate firm aspiring to achieve a better view of your ROI or looking to make your fund calculations simpler and at scale, ThoughtFocus can help. Reach out to our team of financial and technology solution experts at for more information and we’ll get back to you at the earliest.