The “waterfall” is the set of rules that decide who gets paid, and in what order, when a fund returns money. Fund I uses a European-style waterfall: fund-level, fully cross-collateralised, with a 100% GP catch-up. That phrasing carries a lot of meaning — here is what each part does.
The four tiers, in order
- 1. Return of capital. First, all distributions go to the limited partners (LPs) until they have received back 100% of the capital they contributed (and, typically, fees and expenses). The general partner (GP) earns no carry until LPs are whole.
- 2. Preferred return (the hurdle). Next, LPs receive a preferred return — Fund I’s hurdle is 8% per annum — on their contributed capital. This is the minimum annualised return LPs earn before the GP shares in profits.
- 3. GP catch-up. Once LPs have their capital plus the hurdle, the GP enters a catch-up: it receives a larger share (here, a 100% catch-up) of further distributions until the GP has earned its agreed carry percentage of the total profit above the return of capital.
- 4. The 80/20 split. After the catch-up, all remaining profit is split 80% to LPs and 20% to the GP — the 20% being carried interest, the GP’s share of the upside.
Why “European” (fund-level) matters
In a European (whole-fund) waterfall, carry is calculated across the entire fund: the GP earns carried interest only after the fund as a whole has returned all LP capital and the preferred return. Contrast this with an American (deal-by-deal) waterfall, where the GP can take carry on each winning deal before the losers are accounted for. The European model is LP-friendly because it removes the risk that the GP is paid carry on early winners while later deals lose money.
“Fully cross-collateralised”
Cross-collateralisation means gains and losses across all the fund’s investments are pooled before carry is worked out. A great exit cannot be cashed in by the GP in isolation; it is netted against the rest of the portfolio. Combined with the European structure, this aligns the GP with the LPs’ total outcome, not just the highlights.
A worked intuition
Suppose LPs commit and fund USD 10M and the fund eventually returns USD 20M. First, USD 10M goes back to LPs (return of capital). Then LPs receive their 8% preferred return on that capital. The GP then catches up, and the remaining profit is divided 80/20. The net effect: LPs keep all of their money and a guaranteed-priority return before the GP participates, and the GP’s 20% carry is genuinely a share of profit — earned only after the LPs are made whole.
This is a simplified explanation of a standard structure for general understanding, not a description of any specific entitlement. The precise mechanics, definitions and any catch-up and clawback provisions are governed solely by the fund’s limited partnership agreement and subscription documents. Model your own commitment with the returns illustrator, and confirm terms with the definitive documents and your advisers.