qashqade on waterfalls: Should you buy a car or a driver?

qashqade’s Oliver Freigang and Gregor Kreuzer explore different options for firms seeking to modernize their approach to calculating waterfalls.

This article is sponsored by qashqade

Building a waterfall model in today’s most used application – Excel – is a bit like building your own car. When you imagine your car as a chair with four wheels and a steering wheel, building it yourself might seem doable. But then, would you risk driving it on a highway? Not to mention that you forgot the engine…

Oliver Freigang

Comparing a waterfall model to building a car is not that far-fetched. Like a car, the waterfall model tends to have more moving parts than meets the eye. When you set up a waterfall calculation in Excel, you might not think about all the cases the calculation needs to cover, what sort of transactions may come along, the side letters that add further complexity or the requests for transparency that come from LPs. With all these balls to juggle, it would be a minor miracle if you didn’t make some mistakes along the way.

And did you think about the possibility that maybe over the life cycle of the fund, somebody else might be responsible for using your waterfall model in Excel? This inevitably leads to (overly-)complex workbooks, workarounds like creating a file per version, hand-over issues with multiple layers of logic within the same file, undetected errors, delays in response and the looming possibility of reputational damage and loss of custom in the highly competitive funds market.

But then, there is no need to build a car by yourself. There are experts out there, who do that every day. They learn from the past and make the car better every time. They ensure that every new model has features that improve the driving experience. And you feel rather safer driving the car on a highway.

The same is true for waterfall calculations. There is no need any more to create them in a tool not built for the purpose. There are services out there which allow you to buy the solution, instead of trying to find it yourself.

Essentially there are two different types of offerings available in the market: a car with a driver, or a car you drive yourself.

Gregor Kreuzer

The ‘full service’ model

Outsourcing the waterfall calculation to experts who possess specialized tools (but often use Excel as well) is not a new idea. Plenty of fund administrators or technology companies have been established to provide services with and around carry calculations. This ‘full service’ model allows firms to profit from service providers’ experience in setting up waterfall models. It has the additional advantage that the fund manager can insist the service provider works according to their requirements, in order to avoid obstacles and to understand and solve issues.

But if the car is just a chair with four wheels, then the driver can only do so much. In addition, it requires significant experience and expertise to correctly calculate very complex waterfalls. This skill set is not readily available and can usually be found only at a high price. Fund managers therefore often end up calculating the waterfall again using their internal models, just to ensure that the service provider’s calculations are correct (which often they are not).

An additional disadvantage of the ‘full service’ model for calculating waterfalls is the need for regular communication. A fund manager has no direct access to the wheel and must communicate anything it wants changed to the outsourcing partner. But there is always the risk that information gets lost in translation and the fund manager might have to endure frustrating delays as they wait for the service provider to respond.

The ‘self-service’ model

Using new technology to calculate the waterfall is a rather new trend. Often it is labeled as self-service. Here, the product carries all the experience and knowhow. And therefore, the product needs to be able to handle all the complexities currently found in the alternatives industry. There is no driver to cover-up for weaknesses in the product. The fund manager is in the driver’s seat and decides what to do. Any data entry, modeling or calculation that the fund manager needs can be done immediately.

Using self-service software has many advantages, including:

  • Increased flexibility: when utilized properly, with new or existing data, decision-makers can easily create specific scenarios for their waterfall calculations and can therefore address key business challenges quickly and effectively;
  • Speed of decision-making should improve, since you can model and simulate with the right software in real-time and do not need to rely on someone else first having to make those calculations or perform the analysis;
  • Costs: in general, a self-service model should be more cost effective than a full-service model since you do not have to pay for the ‘driver’.

The disadvantage is that whoever uses the self-service tool must be open to new technology and digitization. The fund manager then needs to trust the software and the outcome. While this is easier said than done, the fund manager also needs that trust if they outsource to an external provider.


Whatever model you might choose, be it the full-service model or the self-service model, you should decide beforehand what you would like to get out of it.

If you are looking to outsource everything, and are willing to trust the output from a service provider that comes with a high price tag, then the full-service model might work best for you. Just consider as well what your investors might say if the calculations are erroneous and how you might handle complaints if you have outsourced everything but are ultimately still held responsible.

“There are services out there which allow you to buy the solution, instead of trying to find it yourself”

If you are looking to keep full control and are interested in maintaining the highest flexibility for your calculations, then a self-service tool might work better. The self-service tool should provide you with easy-to-use software that can be used without any major training. It should be able to reduce the time you spend on these waterfall calculations significantly, while increasing the transparency of your calculations.

As you move away from Excel and all its weaknesses to explore new technology, ultimately it is up to you to choose the right model for yourself and your firm.

Some changes need courage, time, money and effort, but it will be worth it all!

Oliver Freigang is the chief executive and co-founder of qashqade. Gregor Kreuzer is chief product officer and co-founder.