What is a Distribution Waterfall? PE & VC Fund Waterfalls Explained

Q: What is the difference between a European and an American waterfall?

A European (whole-fund) waterfall returns all contributed capital and the preferred return before the GP earns any carry. An American (deal-by-deal) waterfall calculates carry as each deal is realised, so the GP is paid earlier but clawback risk is higher.

Q: What is a GP catch-up?

The catch-up is the tier after the preferred return in which the GP receives a large share, often 100%, of distributions until it has received its carry percentage of total profit to date.

Q: What is a preferred return?

The preferred return, or hurdle, is the minimum annual return LPs must receive on their contributed capital before the GP earns carry. 8% a year, compounding, is common.

Q: Where is the waterfall defined?

In the fund's legal documents, usually the limited partnership agreement. The terms are negotiated and vary by fund.

By aama.io Fund Operations Team · Last reviewed 2 October 2026

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.

Sourced information — it can change

This page is compiled from public sources (listed at the bottom) and last reviewed on 2 October 2026. Regulations, thresholds, fees and market practice change, so it may not reflect the latest position. Check with your fund documents (LPA) and legal counsel before acting.

Key facts

Defined in	The limited partnership agreement (LPA)
Common tiers	Return of capital → preferred return → GP catch-up → carried interest split
Typical preferred return	8% a year, compounding (negotiated per fund)
Typical carry	20% of profits
Two main models	European (whole-fund) and American (deal-by-deal)
Protection for LPs	GP clawback if carry is overpaid

How it works

Tier 1: return of capital. Distributions first go to LPs until they have received back all capital they have contributed. In a European waterfall this is all contributed capital across the fund; in an American waterfall it is the capital for the deals being realised.
Tier 2: preferred return (hurdle). LPs then receive a preferred return on their contributed capital, commonly 8% a year compounding. The GP earns no carry until this hurdle is cleared.
Tier 3: GP catch-up. The GP then receives a large share, often 100%, of distributions until it has received its carry percentage of total profit so far (preferred return plus catch-up). A partial catch-up (for example 50%) is also used.
Tier 4: carried interest split. All remaining proceeds are split between LPs and the GP at the carry ratio, typically 80% to LPs and 20% to the GP.
Clawback. If the GP has been paid more carry than it is entitled to over the fund's life, which is more likely under an American waterfall, the LPA may require it to return the excess.

Worked example: European waterfall: $100M fund, $180M of proceeds

LPs contributed $100M. The fund distributes $180M in total. Terms: 8% compounding preferred return, 100% GP catch-up, 20% carry. For simplicity, assume all $100M was outstanding for 4 years, so the preferred return is $100M × (1.08⁴ − 1) ≈ $36M.

Tier 1: return of capital to LPs	$100M
Tier 2: preferred return to LPs	$36M
Tier 3: GP catch-up (solves C = 20% × (36 + C), so C = 9)	$9M
Distributed after tier 3	$145M
Tier 4: remaining $35M — 80% to LPs	$28M
Tier 4: remaining $35M — 20% to GP	$7M
Total to LPs ($100M + $36M + $28M)	$164M
Total carry to GP ($9M + $7M)	$16M

Total profit is $80M ($180M − $100M) and the GP's $16M is exactly 20% of it. A full catch-up restores the GP to the headline carry rate once the hurdle is cleared.

Common mistakes

Assuming 20% carry is paid on all profit regardless of the hurdle. Below the preferred return the GP earns nothing.
Mixing up the catch-up percentage with the carry percentage. They are separate negotiated terms.
Modelling an American waterfall as if it were European. Early deal-by-deal carry can exceed the whole-fund entitlement and trigger a clawback.
Ignoring management fees and fund expenses, which are part of the capital LPs must get back in tier 1.

The Singapore and APAC angle

Waterfall terms are set in the fund documents (LPA for a limited partnership; the constitution and subscription documents for a VCC), not by Singapore law, so the economics are market-negotiated. What the Singapore context adds is operational: a VCC with several sub-funds needs the waterfall calculated per sub-fund, and the GP's carry tax treatment depends on whether the fund holds a Section 13O or 13U incentive.

Frequently asked questions

What is the difference between a European and an American waterfall?

What is a GP catch-up?

What is a preferred return?

Where is the waterfall defined?

Free tools

Distribution Waterfall Calculator (LP/GP, Carry, Catch-up)American vs European Waterfall Comparator Management Fee & Carried Interest Modeler

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Go deeper

American vs European Waterfalls: How Carry Timing Changes What LPs Keep

Related terms

Capital Call

A capital call, also called a drawdown, is a formal request from a fund manager for limited partners to pay in part of the capital they committed. Funds call capital as needed for investments, fees and expenses, rather than collecting the full commitment upfront, and each LP pays pro rata to its commitment.

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.

Sources

ILPA Principles 3.0

General information, not tax, legal, accounting or investment advice. This content is sourced from the references above and from public regulatory material, and it can become outdated. Always confirm the current position with your fund documents (LPA) and legal counsel, and take professional advice for your specific situation, before relying on it.