Fund economics

Distribution Waterfall

A distribution waterfall is the order of priority in which a fund's proceeds are paid out. Typically LPs first receive their invested capital back, then a preferred return, then the GP receives a catch-up, and finally profits are split between LPs and the GP, usually 80/20, as carried interest.

Carried Interest

Carried interest, or carry, is the share of a fund's profits paid to the general partner as performance compensation, typically 20%. It is earned only after limited partners have received their capital back and, in most funds, a preferred return, and it is paid through the fund's distribution waterfall.

Management Fee

A management fee is the annual fee a fund pays its manager to cover operating costs, regardless of performance. In private equity and venture capital it is commonly around 2% a year, charged on committed capital during the investment period and on invested capital afterwards, and it is funded through capital calls.