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Waterfall

The order in which distributions are split between investors and the manager, through return of capital, preferred return, catch-up and carry. European waterfalls calculate at fund level, American at deal level.

Waterfall — The order in which distributions are split between investors and the manager, through return of capital, preferred return, catch-up and carry. European waterfalls calculate at fund level, American at deal level.

The choice between a European and American waterfall is arguably the single most consequential structural decision in a fund's economics — it changes not the ultimate carry earned if the fund performs, but when the manager gets paid relative to when investors get their capital back.

Frequently asked questions

What is the difference between a European and American waterfall?

A European waterfall calculates carry across the whole fund, so all capital and preferred return must be returned before any carry is paid; an American waterfall calculates it deal by deal, letting a manager earn carry on early winners sooner.

Which waterfall type is more investor-friendly?

The European (whole-fund) structure is generally considered more LP-favourable, since it delays carry until the fund as a whole has returned capital, which is why it's now standard in much of the market.

Nothing on this page is legal, tax, or investment advice. SeRuM is not a registered broker-dealer, not a placement agent, and not an investment adviser.

Catch-upA waterfall stage where the manager receives a disproportionate share of profits after the Carried interestThe manager's share of fund profits, typically paid after a preferred return and a catch-u Waterfall carry calculatorRelated reading.

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