How fund proceeds split between LPs and GP after a deal exits. Pref hurdle, catch-up, carry โ the four-stage waterfall built from the LPA. Switch between European (whole-fund) and American (deal-by-deal) mechanics to see how the same exit produces different cash to GP under each.
Negative bars are commitment calls (year 0). Positive bars are distributions to LP (navy) and GP (sage). Recap distributions appear in year 3 if non-zero; final exit at the hold year.
Single-exit deals like this one converge to nearly the same numbers. The waterfall structure matters most when there are intermediate distributions โ recaps, partial sells โ because American allocates carry along the way (with clawback) while European holds it back until LPs are made whole.
The four-stage waterfall. When a deal exits and cash flows back to the fund, the LPA dictates the split. Stage 1: return of capital โ LPs and GP get back their commitments pro-rata. Stage 2: preferred return โ LPs get a hurdle (typically 8% IRR) on their capital before GP earns any carry. Stage 3: GP catch-up โ GP gets the next chunk of cash so that GP's share of cumulative profit equals the carry rate (with 100% catch-up, GP gets it all until the math balances; with 50% catch-up, GP gets half and LPs the other half). Stage 4: carry split โ the remainder is shared 80/20 (LP/GP), or whatever the LPA stipulates.
European (whole-fund) waterfall. The clean version. All capital across all deals in the fund must be returned to LPs, and all LPs must clear the pref hurdle, before GP earns any carry. GP doesn't see carry until late in the fund's life โ but there's no risk of clawback, because LPs are always made whole first. LPs love it; GPs less so.
American (deal-by-deal) waterfall. Carry is computed on each successful exit individually โ GP gets paid earlier. The catch is the clawback: if later deals lose money, GP has to give back any carry already paid (subject to interim escrow / GP balance sheet). American is more common in US PE; European in European PE and most credit funds.
Single-exit interpretation. For a one-deal calculation like this page, both waterfalls produce nearly identical totals โ the timing differences only matter when there are multiple distributions. That said: if you flip to American and add a year-3 recap, you'll see GP getting carry on the recap proceeds while European holds it back until the final exit.
What's not modeled here. Management fees (typically 1.5โ2% of commitments), fund expenses, deal-level fees, GP clawback escrows, transaction-fee offsets, side-letter terms. This is the simplified mechanics โ useful for understanding the structure, not for negotiating an LPA. See the disclaimer.
The Returns Waterfall decomposes deal-level returns (EBITDA growth / multiple change / debt paydown). This page splits those returns between LP and GP. Together they cover the full path from operating performance to GP's bonus check.
โ Open the Returns WaterfallNothing on this page is investment advice. Simplified mechanics for educational purposes. See the full disclaimer.