Term: Waterfall

Often called the distribution waterfall this is the method by which the cash proceeds from a fund are distributed between LPs and GPs. Typically a waterfall calls for LPs to receive the first waves of distributions and then GPs begin to collect their own distributions ultimately including their carried interest if indeed the fund is profitable enough. Historically US-style distribution waterfalls allow GPs to begin collecting their carried interest early in the life of the fund. But European style waterfalls stipulate that the LPs must have their entire commitment amount plus a preferred return distributed them before the GP may begin to take carried interest. This usually means the GPs don’t make the big bucks until years into the life of the fund. As in: My LPs are really pressing my firm to adopt a European waterfall but I’ve got young guys working here who don’t want to wait that long.

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