Glossary · Fund economics

What is an American waterfall?

An American, or deal-by-deal, waterfall lets the manager earn carry on each sale as it happens, usually after investors recover that deal’s cost and a share of fees.

In practice

Set out in the distribution provisions of the LPA, this structure has been common in US buyout, venture and real estate funds and is rare in Europe. Terms vary: some versions require recovery of realized losses and write-downs on earlier deals before carry is paid, which brings them closer to a whole-fund test. It is often called deal-by-deal and contrasted with the European waterfall.

An example

Round numbers, not a real fund

Say a fund sells its first company at a $30 million gain. Under a deal-by-deal waterfall the manager can take carry on that gain right away, subject to a later clawback.

Why it matters

Managers get paid sooner under it, which is why it usually comes with a clawback.

A definition, not advice; where usage varies the entry says so. Something wrong? Tell the desk.

Related terms

European waterfallA European, or whole-fund, waterfall pays the manager carry only after investors have received all their paid-in capital, plus the preferred return, across the entire fund.
ClawbackA clawback makes a manager return carried interest it was paid early, if later losses mean it received more than its agreed share of the fund’s total profit.
Distribution waterfallA distribution waterfall is the order a fund pays out proceeds: investors’ capital, then the preferred return, then the manager’s catch-up, then the split of what remains.
Carried interestCarried interest is the share of a fund’s profits, typically 20%, that the manager earns after investors get their money back and clear the preferred return.
LPAThe limited partnership agreement, or LPA, is a private fund’s main contract. It sets the fees, carry, investment limits and the rights of the manager and the investors.

The terms, in the news each morning.

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