Glossary · Fund economics

What is a European waterfall?

A 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.

In practice

The distribution terms sit in the LPA, usually with the carry percentage, hurdle and catch-up. Because carry starts late, it often arrives near the end of a fund’s life, and the clawback matters less than under a deal-by-deal structure. Often called a whole-fund waterfall, it is the usual structure in European buyout funds and is contrasted with the American, deal-by-deal waterfall.

An example

Round numbers, not a real fund

Say a fund has made three investments and sold one at a $30 million gain. Under a whole-fund waterfall, the manager waits for carry until investors have all they paid in, plus the hurdle.

Why it matters

It is the version investors prefer, because the manager cannot be paid on early wins while later deals are still unproven.

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

Related terms

American waterfallAn 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.
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.
Hurdle rateA hurdle rate, or preferred return, is the minimum yearly return, often 8%, that investors must receive before the manager can start earning carried interest.
GP catch-upThe catch-up is the part of a fund’s waterfall, after the hurdle, where the manager takes most or all distributions until it holds its full share of the profit.
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.

The terms, in the news each morning.

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