What is Catch-Up Clause?
A catch-up clause lets the GP receive most or all profit distributions after LPs get their preferred return, until the GP has "caught up" to its full carried interest percentage on all profits — not just profits above the hurdle.
In a waterfall with an 8% hurdle and 20% carry, the catch-up answers a key question: is the GP's 20% measured on profits above the hurdle, or on all profits? With a full (100%) catch-up, once LPs receive their 8% preferred return, the next dollars go entirely to the GP until the GP holds 20% of total profits distributed; thereafter profits split 80/20. Without a catch-up, the GP earns carry only on profits above the hurdle — meaningfully less.
Catch-up structures vary: 100% catch-up is most GP-friendly, while 50% catch-ups (splitting dollars 50/50 during the catch-up tier) are a common compromise. The presence and speed of the catch-up significantly changes GP economics at moderate return levels, which is why LPs model the full waterfall rather than just comparing headline carry percentages during fund diligence.
Also known as: GP catch-up, catch-up provision, 100% catch-up