The distribution waterfall is a methodology for splitting distributions between the GP entity and Limited Partners. Typically, the GP takes 20% carried interest on profits. The distribution waterfall outlines how and when this carried interest is allocated. An American waterfall refers to a deal-by-deal method of allocating carried interest. This means that the GP entity receives carry on a deal-by-deal basis before investors are made whole overall. This allows the GP to receive carried interest sooner. The American waterfall is juxtaposed with the European waterfall with is a method by which all Limited Partners’ capital contributions (including unrealized investments) have been repaid before the GP entity receives its carried interest. While the American waterfall allows you to take carry earlier usually, in practice, you should not take the entirety of your share of carried interest until Limited Partners are made whole to avoid having to clawback the GP carried interest.
