Distribution Breakdown
European Waterfall (Whole-Fund)
In a European waterfall, distributions follow a strict sequence across the entire fund. LPs receive 100% of their contributed capital back before any carry is paid. Once capital is returned, LPs receive their preferred return (typically 8% compounded annually). Only after both thresholds are met does the GP begin to receive carried interest through the catch-up provision. Any remaining proceeds are split according to the carry percentage.
This structure protects LPs by ensuring the GP only earns carry on realized, whole-fund performance. It is the standard in most institutional private equity funds and is strongly preferred by pension funds, endowments, and sovereign wealth funds.
American Waterfall (Deal-by-Deal)
An American waterfall calculates carried interest on individual deals as they are realized, rather than waiting for the entire fund to return capital. The GP earns carry on profitable exits even if other investments in the portfolio are unrealized or impaired. The preferred return is typically calculated using simple interest on a per-deal basis, and carry is paid as each deal closes.
This structure benefits GPs through earlier carry payments but introduces risk for LPs. If later deals underperform, the GP may have already received carry that exceeds what they would earn on a whole-fund basis. Some American waterfall agreements include a clawback provision requiring the GP to return excess carry at fund liquidation, though enforcing clawbacks can be complex in practice.
Catch-Up Provision
The catch-up allocates 100% (or a specified percentage) of distributions above the preferred return to the GP until the GP has received their target carry on total profits. A 100% catch-up means the GP receives every dollar above the hurdle until they reach their carry split. A 50% catch-up means distributions above the hurdle are split 50/50 until the GP reaches their target. No catch-up (0%) means remaining profits are simply split at the carry rate without any acceleration.
Industry Standards
The "2-and-20" model (2% management fee, 20% carry above an 8% hurdle) remains the baseline for institutional PE funds, though terms vary. Established managers with strong track records may negotiate higher carry (25-30%) or lower hurdles. Emerging managers typically offer LP-friendly terms to attract initial commitments. European waterfalls account for approximately 75-80% of institutional PE fund structures globally.
For detailed carry modeling on a single fund, see the Carried Interest Calculator.
This calculator provides a simplified model for illustrative purposes. Actual waterfall mechanics are governed by the limited partnership agreement (LPA) and may include provisions for management fee offsets, GP clawbacks, escrow requirements, and tiered carry structures not modeled here. Consult your fund counsel for specific calculations.
