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Complex Waterfall Structures: Identifying, Allocating, and Reporting Preferred Returns, Clawbacks, Taxable and Nontaxable Capital Shifts

Recording of a 110-minute CPE webinar with Q&A

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Conducted on Friday, May 16, 2025

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This webinar will go beyond reporting basic waterfall allocations. Our panel of veteran partnership professionals will point out complex waterfall language in operating agreements, review preferred returns and clawback provisions, and tackle target issues, including target returns with guaranteed payments and those that include taxable and nontaxable capital shifts.

Description

Waterfall provisions ensure investors recoup their investment along with a specified rate of return referred to as a hurdle rate. Once the return of capital is recovered, profits are allocated as stipulated in the operating agreement. Almost always, there are preferred returns that guarantee the limited partners' specific returns and motivate the general partner to maximize profits on the investment. These distribution tiers are known as waterfalls, and computing and reporting these distributions is complicated.

Private equity investments usually consist of multiple deals. A general partner's share of profits from an investment is referred to as the fund manager's carried interest or carry. A volatile market, for example, could produce early gains followed by subsequent losses. A clawback provision requires the general partner repay the prior excess distributions. These repayments are generally repaid net of the tax paid on the prior profit distribution.

Listen as our panel of experts guides you through challenging waterfall scenarios utilizing illustrative examples of these arduous calculations. Tax practitioners working with private equity partnerships need to understand how to calculate, allocate, and report complex waterfall structures.

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Outline

  1. Target capital account basics
  2. Components of complex waterfalls
    1. Preferred returns
    2. Operating distributions
    3. Tax distributions
    4. Performance driven metrics
    5. Clawback provisions
  3. Advanced target issues
    1. PIP (partners' interests in the partnership) allocations
    2. Guaranteed payments
    3. IRC Section 704(c)
    4. Nontaxable capital shifts
    5. Taxable capital shifts
  4. Boilerplate language
    1. Gross vs. net P&L provisions
    2. Provisions apportioning the general partner's proceeds
    3. Liquidating provisions

Benefits

The panel will cover these and other critical issues:

  • Targeted returns using guaranteed payments
  • Calculating preferred returns
  • Identifying boilerplate language in operating agreements for waterfall structures
  • Impact of clawback provisions on general and limited partners

Faculty

Clayman, Jeffrey
Jeffrey Clayman, CPA, JD, LLM
Tax Senior Director
Alvarez & Marsal

Mr. Clayman has over 18 years of public accounting experience with a focus on for-profit businesses in many different...  |  Read More

Keller, Griffin
Griffin Keller, CPA
Director
Alvarez & Marsal

Mr. Keller is a Director with Alvarez & Marsal Tax based out of Washington, D.C, primarily focusing on...  |  Read More

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