Fees & Economics
What is Distribution Waterfall?
A distribution waterfall is the order in which a fund’s profits are split between limited partners and the general partner — typically: return of capital, then preferred return, then GP catch-up, then the carry split.
The distribution waterfall defines the priority of payouts as a fund returns money. A common sequence is: (1) return of capital to LPs, (2) preferred return to LPs up to the hurdle, (3) GP catch-up, and (4) the residual split (e.g., 80% to LPs / 20% carry to the GP).
Waterfalls come in "European" (whole-fund) and "American" (deal-by-deal) styles, which materially affect when the GP starts earning carry.
Also known as: waterfall