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Distribution Waterfall in Finance: Definition and Tiers American vs European Distribution Models The biggest structural decision in any private equity waterfall is whether distributions are calculated one investment at a time or across the entire fund This choice affects when the manager gets paid, how much risk the investors bear, and how complicated the accounting becomes Deal-by-Deal (American
What Is a European Waterfall in Private Equity? - LegalClarity Comparison to the American Waterfall The European Waterfall is primarily distinguished from the American Waterfall by the scope upon which the distribution tiers are calculated The European model uses the “whole fund” approach, while the American model operates on a “deal-by-deal” basis
Equity Waterfall Explained: Tiers, Types, and Terms European Waterfall (Fund-Level) A European waterfall applies the distribution calculation across the entire fund portfolio The GP cannot collect any carry until the LPs have received their full return of capital and preferred return on all invested capital, not just a single deal
How Does Carry Work in Private Equity: Tax and Waterfalls The waterfall structure just determines the order of payments, not the final percentages American vs European Waterfalls The waterfall tiers described above apply in both major distribution models, but the timing differs significantly depending on which structure the fund uses
How Waterfall Allocations Work in Private Equity - LegalClarity The European model ensures the GP’s Promote is contingent upon the overall success of the partnership’s capital deployment Conversely, the American Waterfall model applies the distribution tiers on a Deal-by-Deal basis
How to Calculate Carried Interest in Private Equity The vesting schedule won’t change the fund-level waterfall math, but it matters for calculating what any individual GP partner actually takes home American vs European Waterfall Structures Before running the numbers, you need to know which waterfall model the fund uses, because the timing of when carry is calculated and paid changes everything
How Does Carry Work in Private Equity: Taxes and Structure After the catch-up is complete, every additional dollar of profit reverts to the standard 80 20 split between LPs and the GP European vs American Waterfall Models The timing of carry payments depends on which distribution model—or “waterfall”—the fund uses This choice is one of the most heavily negotiated terms during fund formation
What Is Carry in Private Equity and How Is It Taxed? American Waterfall vs European Waterfall The two main waterfall models differ in when the GP starts receiving carry Under an American (deal-by-deal) waterfall, the GP can collect carry after each individual investment is sold at a profit, even if other investments in the fund are still ongoing or have lost money