Catch-Up
Private Equity glossary · Private Equity Fundamentals
Definition
Tier 3 of a European waterfall, executed after LPs have received return-of-capital and the preferred return. With a 100% catch-up (GP-favorable), all distributions flow to the GP until cumulative GP profit equals 20% of total profit; algebraically, if LP cumulative profit is L and the catch-up amount is x, the condition x = 0.20 · (L + x) solves to x = L/4. With a 50/50 catch-up (LP-favorable), distributions split evenly during catch-up, so the same target requires 0.5x = 0.20 · (L+x), giving x = 2L/3 — twice the catch-up duration. The catch-up structure affects when the GP receives carry, not the ultimate 80/20 split at full distribution.
Catch-Up in plain English
Imagine investors (the LPs) hand a fund manager (the GP) their money to invest. The deal is that once profits come in, the GP eventually keeps 20% of the total profit as their reward ("carry") and the investors keep 80%. But the investors get paid FIRST — they get their original money back plus a guaranteed minimum return before the GP sees a dime. The "catch-up" is the stretch right after that where the GP grabs a bigger share of incoming cash to quickly "catch up" to its full 20%, like a runner sprinting to pull even after giving a head start. A 100% catch-up sends every dollar to the GP until it's caught up (fast, GP-friendly), while a 50/50 catch-up splits those dollars evenly (slower, LP-friendly) — but either way the finish line is the same 80/20 split; only the timing of when the GP gets paid changes.
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