Firms looking to keep their hurdle low may opt for an anniversary date model. This calculates separate preferred return accruals for each capital call and compounds them on their respective anniversary dates. This model introduces two main complexities:
- It can be difficult to maintain separate preferred return accruals for each capital call
- Handling exits resulting in the partial pay down of a commitment may become more Partially returned capital calls require the financial controller to retroactively split the commitment into a returned portion, which no longer accrues preferred return after the exit date, and an unpaid portion that continues to accumulate.
Despite the inherent complexities, an anniversary date waterfall tracks accrued preferred return on outstanding capital more accurately than a fixed date model and will always result in a lower hurdle value. Depending on the size and timing of cash- flows, carry payments to partners may also be available earlier in the fund’s life.