Waterfalls
What is a waterfall in sponsor economics?
A waterfall is the distribution logic that determines how cash moves through the stack and when the sponsor earns upside.1,2
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Waterfalls define the order of payouts, the return thresholds, and the point at which the sponsor participates in upside. A typical structure starts with return of capital, then a preferred return or hurdle, then catch-up mechanics, then the final residual split. Without a clear waterfall, the economics become ambiguous, exit modeling gets unreliable, and investor trust can break down exactly when cash is ready to move.1,2
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Related glossary terms
Related comparisons
Preferred Return vs Hurdle Rate
Preferred return and hurdle rate both define the return threshold LPs receive before the sponsor participates in upside. The distinction is usually structural rather than conceptual. For sponsors, the decision affects return thresholds, reporting cadence, and who owns execution risk.
Waterfall vs Promote
The waterfall defines distribution order. Promote defines the sponsor's share of upside inside that order. For sponsors, the decision affects sponsor economics, reporting cadence, and who owns execution risk.
Sources & References
- 1.Institutional Limited Partners AssociationCapital Call & Distribution Notice TemplateILPA(Capital call, distribution notice, LP reporting, and investor communication standards.)primary · workflow-standard · waterfalls
- 2.Internal Revenue ServicePartnershipsIRS(Partnership tax and reporting context for private vehicles.)primary · tax-context · waterfalls