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.

Example

Carry is paid only once total distributions exceed all capital LPs contributed.

Important

It aligns carry with overall fund performance and reduces the need for clawbacks.

Related terms

• 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.
• Clawback — A provision requiring a fund manager to return carried interest that exceeds what the fund's final overall performance justifies.
• Carried interest — The share of a fund's profit that the manager keeps, conventionally around twenty percent, usually payable only above a defined return to investors.

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