In a typical private equity waterfall, investors get their money back and a preferred return before the manager takes its share of the profit. If less cash comes back, the manager's share can be zero. Simple example, before fees. Terms vary by fund.
What the film says
In private equity, a manager's cut usually waits behind the investors. That order is called the waterfall. It decides who gets paid out of a fund, and when. Say investors put in a hundred million dollars. Years later the companies are sold, and two hundred million comes back. First, investors get their hundred million back. The manager gets nothing from this yet. Next, investors get a first slice of the profit, called the preferred return. Say forty million. Only now does the manager get paid. This is the catch-up: ten million, bringing it to twenty percent of the profit so far. Whatever is left splits eighty, twenty. Forty to investors, ten to the manager. Investors end with a hundred and eighty. The manager's twenty is its carried interest, a fifth of the profit. So why do investors care? If only a hundred and forty comes back, the cash runs out here. The manager's share is zero. That is the waterfall. It decides who gets paid, and when. IN PRIVATE EQUITY,
In the glossary: Distribution waterfall
A simple example with round numbers, not advice. Terms vary by fund.
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