What is a waterfall in private equity funds?
In private equity and venture capital fund management, a "waterfall" is the contractual method and distribution model used to allocate investment proceeds, capital gains, and profits between limited partners (investors) and general partners (fund managers). Typically, the waterfall dictates that limited partners receive their initial capital contributions back plus a predetermined preferred hurdle rate of return before the general partner is entitled to collect their carried interest performance fee—often structured as a 20% share of remaining profits—incentivizing managers to maximize portfolio returns.
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