Distribution Waterfall
Private Credit glossary · Fund Structures, Returns & Economics
Definition
Order of priority for distributing fund cash flows among the GP and LPs, typically: return of capital → preferred return → GP catch-up → carried interest split.
Distribution Waterfall in plain English
A distribution waterfall is simply the rulebook for who gets paid, and in what order, when a fund makes money. Picture water filling a tiered fountain: the top bowl fills completely before anything spills to the next. First, investors (the LPs, who put up the money) get their original cash back; then they earn a promised minimum return (the "preferred return"); then the manager (the GP, who runs the fund) gets a "catch-up" to balance things out; and finally the remaining profit is split, with the manager keeping a slice called "carried interest" as their reward for good performance. The point is fairness and incentives — investors are made whole first, and the manager only strikes it rich if everyone did well.
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