Definition
Waterfall structures prioritize payments—preferred returns first, then sponsor promotions, remaining to capital. It aligns incentives and protects investors.
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Waterfall structures prioritize payments: preferred returns first, then general partner promotes, remaining to capital. Aligns incentives and protects investors. Example: 7% preferred to LPs, then 70/30 split above preferred. Encourages sponsor to maximize returns above preferred. Details matter significantly for investor returns. Variations include GP clawback provisions. Complex calculations required for accurate projections. Key terms requiring careful review. Transparency in waterfall structure builds investor confidence.
Pro Tip
Understand waterfall structure completely before investing.
Example
Waterfall distributed 7% preferred return first, then 75/25 split above preferred.