Waterfall Automation: Top 5 Best Practice Tips

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Raising the Standard for Back-Office Operations

Waterfall automation holds the promise of setting a new, higher operational standard for private capital fund managers and administrators - delivering a streamlined, end-to-end workflow for carried interest calculations and reporting, with significantly enhanced efficiency, accuracy, and control.

As demand grows and adoption accelerates, the market for automation solutions reveals wide variability in design, functionality, ease of use, and operating models - from true self-service platforms to consultant-dependent implementations. These differences directly impact implementation timelines, scalability, and the realization of meaningful economic and operational efficiency gains.

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To justify the investment and fully realize the benefits of automation, solutions must deliver a core set of “table stakes” features and best practices.

This brief - drawing on Cascata’s deep industry expertise and leadership in digital waterfall software innovation - highlights five essential criteria that define a new benchmark in carried interest and fee management.

1. Formula Traceability
Excel remains the universal tool for fund accountants to calculate periodic carried interest, valued for its flexibility, control, and formula-level traceability. Any credible automation solution must preserve these qualities - it is non-negotiable. Without transparent and traceable formulas, automation forces reliance on a “black box” system while maintaining parallel spreadsheets for verification and reconciliation. This undermines efficiency and often increases workload due to duplicated effort.

An ideal solution provides a consistent, auditable framework, producing Excel-based outputs with system-traced formulas that align with the tools fund accountants already trust. It reinforces firmwide standards, adheres to industry best practices, ensures compliance, and delivers audit-ready transparency that builds stakeholder confidence.

2. Intelligent & Enriched Data Integration
A best-in-class waterfall platform must integrate seamlessly with upstream systems - especially the general ledger (GL) - to ensure reliable, end-to-end data flow. Yet GL data quality is often incomplete due to underutilized features, migration gaps, or reliance on offline spreadsheets.

To unlock full automation value, clients must ensure complete and accurate inception-to-date data in the GL, including cash flow timing, transaction categorization, and deal-level granularity.

A flexible, rule-based ETL (Extract, Transform, Load) layer is essential to address data nuances and anomalies. This layer should be self-learning, capable of auto-mapping new transaction types and ingesting external data. It should support:

• Filling in missing values
• Reclassifying overlooked transfers
• Applying bespoke rules (e.g., synthetic preferred return flows)
• Handling fund-specific exceptions to exclude certain entries from NAV

With strong GL lineage and enriched data preparation, automation platforms can deliver consistent, auditable, and accurate calculations while empowering teams with clarity and control.

3. Industry Calculation Method Standards & Compliance
Carried interest automation must not only handle complex calculations but must do so using a “bottom-up” approach, rather than a “top-down” method, to capture carry results at the most granular levels — investor and deal. It must also align with industry-standard calculation methodologies, ensuring a consistent framework for firmwide compliance.

Best-practice platforms come pre-configured to support a wide range of tiered structures, preferred return (PR) methodologies, and related treatments, including:

• Simple Compounding
  
• IRR-based
• Interest on Net Contribution - daily cumulative balance with compounding intervals
• Tranched FIFO - bucketed contributions / distributions with PR calculated from contribution date to first / next distribution date
• Stop the Clock - PR stops when cumulative distributions exceed contributions)
• Adjusting cashflow dates e.g., end-of-month, first of next month

By embedding firmwide and industry standards, these platforms ensure consistency, reduce human error, and provide a scalable, defensible system of record.

4. Technology-Driven Waterfall Modeling
A core requirement for effective automation is a technology-driven modeling engine that eliminates manual template mapping, static Excel logic, and custom-coded models - all of which result in lengthy, fragile and unpredictable implementations and outcomes.

To deliver ROI, best-practice platforms must support the full range of structures - American, European, and hybrid - and cover at least 85% of a firm’s portfolio. This is critical for fund administrators managing hundreds or thousands of diverse client funds. The system must enable auto-configured, dynamic waterfall model construction at scale.

Leading solutions go beyond basic return of capital, hurdle, preferred return, catchup, and residual split GP/LP carry logic to support:

• 10+ tier structures
• Multiple catchups
• Hybrid styles
• External data inputs
• Special gates, overrides, and fund-specific provisions

This level of sophistication delivered in a self-service manner empowers firms to manage complexity without compromising speed, accuracy, or transparency, from implementation through daily operations.

5. Carry Forecasting & Scenario Planning
An increasingly strategic use of waterfall automation is to forecast carried interest outcomes under different performance and timing scenarios. Whether for capital distribution events, budgeting, compensation planning, or LP reporting, forward-looking projections are essential.

Platforms should support intuitive, self-service scenario modeling, enabling teams to evaluate outcomes based on hypothetical NAVs, exit timings, or preferred return assumptions - without modifying source data. These capabilities empower firms to make informed decisions and proactively manage stakeholder expectations.

Conclusion: Unlocking the Full Potential of Waterfall Automation

The top 5 best practices outlined above are not just recommendations - they are essential requirements for unlocking the full potential of waterfall automation. Platforms that combine traceability, enriched data integration, industry-standard methodologies, dynamic modeling, and forecasting empower private capital firms to operate at a higher standard with unmatched transparency, speed, and control.

Compared to legacy methods or consultant-heavy implementations, a modern, purpose-built software approach offers clear advantages:

• Self-service design enables rapid onboarding and model configuration
• Out-of-the-box coverage for 85%+ of fund structures - American and European - regardless of complexity
• Faster time-to-value and reduced dependency on custom development
• Audit-ready transparency and repeatable results

If you're interested in learning more about how Cascata can help you modernize and elevate your waterfall and carry operations, 📩 Email us at [email protected] or click here to request a demo!

About Cascata
Cascata is a leading provider of digital waterfall administration software, purpose-built for the private capital industry. Trusted by top fund managers and administrators, Cascata delivers unmatched automation, transparency, and scalability for complex carried interest and fee calculations—empowering finance and operations teams to move beyond spreadsheets and manual processes.

Our mission is to elevate operational excellence across the industry through continuous product innovation, leadership, and a deep commitment to the success of our clients and partners.