American (Deal-by-Deal) Waterfall

A distribution structure where the manager can receive carried interest on individual profitable deals as they exit, before the whole fund has returned LPs' capital.

Example

A manager takes carry on an early successful exit even though later deals lose money.

Important

It pays managers earlier and relies on clawbacks to correct overpayment, which can be difficult to enforce.

Related terms

• European (Whole-Fund) Waterfall — A distribution structure where LPs receive all contributed capital and any preferred return across the whole fund before the manager receives carried interest.
• Clawback — A provision requiring a fund manager to return carried interest that exceeds what the fund's final overall performance justifies.

Lessons that explain it

• A hurdle protects LPs when returns are modest, and a catch-up gives it back when they are strong — Carried interest is the manager's share of profits. A hurdle rate means LPs receive a minimum return before carry is paid; a catch-up then lets the manager receive its full share once returns clear the hurdle. (14 min)

All 578 terms in the Investing glossary