Deal-by-Deal Waterfall (American Waterfall)
Private Equity glossary · Private Equity Fundamentals
Definition
American-style distribution waterfall in which carry is paid on a deal-by-deal basis — each realization is evaluated against the capital invested in that specific deal, and once the deal returns capital plus preferred, the GP receives 20% of incremental distributions from that deal. GP-favorable relative to European (whole-fund) waterfalls because the GP can receive carry on early winners while the rest of the fund is still negative. Requires a robust clawback mechanism (often with GP escrow) to prevent overpayment of carry — interim checkpoints at end-of-investment-period mitigate the risk. U.S. middle-market historically used American; institutional U.S. and European funds have largely shifted to European. Persists in some venture funds and older vintages.
Deal-by-Deal Waterfall (American Waterfall) in plain English
A fund does many separate deals, and this rule (the 'American' style) decides the fund manager gets their 20% profit share deal-by-deal — as soon as any single deal wins and returns its own money plus the promised minimum, the manager gets paid on THAT deal, even if other deals in the fund are still losing money. It's manager-friendly because they collect their cut on early winners instead of waiting for the whole fund to finish. The catch: if later deals flop, the manager may have been overpaid, so these funds need a 'clawback' — a promise (often with money held in escrow) to give some carry back. The alternative 'European' style waits until the entire fund is profitable before paying the manager anything, and most big institutional funds now prefer that safer version.
Also called: American Waterfall
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