Every question below was observed in a live People-Also-Ask box for a carry search term. None were invented to fill a page.
What is the distribution waterfall mechanism?
A distribution waterfall is the ordered sequence of tiers that determines how a fund's proceeds are split between limited partners and the general partner. Cash flows through the tiers in a fixed order and each tier must be satisfied before the next receives anything: typically return of contributed capital, then the preferred return, then a GP catch-up, then the residual split. The order is the mechanism — the same fund with the same gross proceeds pays different amounts of carry if the tiers are resequenced.
Sources: ilpa-model-lpa-wof-ts · ilpa-model-lpa-wof
What is the correct order of distribution in a typical distribution waterfall?
The conventional order is return of capital, then preferred return, then GP catch-up, then the residual split. Limited partners first receive their contributed capital back; then they receive the preferred return on that capital; then the general partner receives a disproportionate share until it has caught up to its agreed percentage of cumulative profit; then all further proceeds are divided in the agreed residual ratio. Individual agreements vary the details, but a waterfall that departs from this sequence is doing something specific and worth reading closely.
Sources: ilpa-model-lpa-wof-ts · ilpa-model-lpa-wof · duanemorris-clawbacks
What is the difference between American and European distribution waterfalls?
The American waterfall applies the tiers deal by deal, so the general partner can receive carry on a profitable exit while other investments are still held; the European waterfall applies them across the whole fund, so carry is paid only after limited partners have recovered all contributed capital and their preferred return fund-wide. The difference is timing rather than entitlement — both aim at the same ultimate split. Because the American structure pays early, it can overpay if later deals disappoint, which is why it is the structure that requires a clawback.
Sources: ilpa-model-lpa-wof-ts · ilpa-principles-3 · ilpa-fund-terms-2021
What is the American waterfall approach?
The American, or deal-by-deal, waterfall calculates carried interest on each realized investment separately rather than across the fund as a whole. The general partner may therefore be paid carry on an early profitable exit while the fund's remaining investments are unrealized or underwater. It is more favourable to the general partner on timing and is the reason clawback, escrow and holdback provisions exist: if the fund's cumulative result ends below the threshold, carry already paid has to come back.
Sources: ilpa-principles-3 · ilpa-model-lpa-hub · ilpa-fund-terms-2021
What is a European waterfall?
A European, or whole-of-fund, waterfall pays carried interest only after limited partners have received back all contributed capital plus their preferred return across the entire fund. Distributions from early exits go to limited partners until that fund-level threshold is met, so the general partner is paid later than under a deal-by-deal structure. Because carry cannot be paid before the fund-wide test is satisfied, the structure largely removes the overpayment risk that makes clawback necessary.
Sources: ilpa-principles-3 · ilpa-model-lpa-wof · ilpa-fund-terms-2021
Is European waterfall deal by deal?
No — they are the two opposing structures, and the terms are not interchangeable. A European waterfall is whole-of-fund: the test is applied once across all investments. Deal-by-deal is the American structure, where the test is applied to each realization separately. Confusing them inverts the answer to when the general partner gets paid and whether a clawback is needed.
Sources: ilpa-principles-3 · ilpa-model-lpa-wof
What is meant by hurdle rate?
In a fund waterfall the hurdle rate is the annual return limited partners must receive on their contributed capital before the general partner participates in profits. It is usually expressed as a compounding annual percentage and is more precisely called the preferred return. It is a distribution threshold written into the partnership agreement, not a discount rate or a cost of capital — a distinction that matters because the same phrase means something different in corporate finance.
Sources: ilpa-fund-terms-2021 · ilpa-model-lpa-wof-ts
Is hurdle rate the same as IRR?
No — the hurdle rate is a threshold and IRR is a measurement, and the confusion is common enough to be worth stating plainly. The hurdle is the preferred return limited partners must receive before carry is paid; IRR is the annualised rate of return a set of cash flows actually produced. IRR is frequently the yardstick used to test whether the hurdle has been met, which is where the two get merged, but one is a term in the agreement and the other is a calculation performed on outcomes.
Sources: metrick-yasuda
What is the 80 20 rule in private equity?
"80/20" refers to the residual tier of a distribution waterfall, where profits remaining after the earlier tiers are split 80% to limited partners and 20% to the general partner as carried interest. It describes the final split only — it is not a rule and it does not describe the whole waterfall. Return of capital, the preferred return and any catch-up all sit ahead of it, so the share of total profit the general partner actually receives is determined by those earlier tiers rather than by the headline ratio.
Sources: ilpa-model-lpa-wof-ts · duanemorris-clawbacks
What does TVPI mean?
TVPI is total value to paid-in capital: the sum of distributions received and the remaining value of a fund's holdings, divided by the capital limited partners have actually paid in. It states total value created per dollar contributed, realized and unrealized together. Because the unrealized half rests on the manager's own valuations, TVPI is a measure of value that includes an estimate, which is why it is read next to DPI rather than instead of it.
Sources: gips-overview
What's the difference between DPI and TVPI?
DPI counts only cash actually distributed, while TVPI adds the estimated value of what the fund still holds. DPI is distributions to paid-in capital — realized, banked, not a matter of opinion. TVPI is DPI plus RVPI, the residual value to paid-in, so the gap between the two figures is precisely the portion of a fund's reported performance that still depends on unrealized marks. Early in a fund's life that gap is most of the number.
Sources: gips-overview
What is NAV and formula?
Net asset value is the fair value of a fund's assets less its liabilities at a reporting date. In a private fund it is the reported value of the remaining portfolio plus any cash and receivables, minus accrued fees, expenses and other obligations. It is the input behind RVPI and the unrealized half of TVPI, and because most of it is fair-value estimation rather than observed price, the valuation policy behind a NAV matters as much as the figure itself.
Sources: ilpa-reporting-template-2 · ilpa-principles-3
How to calculate nett asset value?
Net asset value is calculated by fair-valuing every remaining portfolio holding at the reporting date, adding cash and receivables, and subtracting accrued management fees, accrued carried interest, borrowings and other liabilities. In a private fund the first step is the whole calculation: almost none of the portfolio has an observed price, so the figure is built from the manager's own valuations under a stated policy. That is why reporting conventions require the valuation basis and the as-of date to travel with the number — a NAV without them is not a calculation anyone can check.
Sources: ilpa-reporting-template-2 · ilpa-principles-3
What is a typical hurdle rate?
The most common preferred return rate in ILPA's 2021 survey of fund terms was 8%, found at 67% of sampled funds, with 16% of the sample carrying no hurdle at all. That is an observed distribution rather than a standard: no regulator or standard-setter publishes a typical rate, and ILPA's own model agreement leaves it bracketed for negotiation. The same survey found 78% of waterfalls accruing the preferred return on a compounded basis, which over a fund's life moves more money than a point of stated rate does.
Sources: ilpa-fund-terms-2021 · ilpa-model-lpa-wof-ts
What is a 12% hurdle rate?
A 12% hurdle rate requires limited partners to receive an annual 12% return on their contributed capital before the general partner takes any share of profit. It sits well above the 8% that ILPA's 2021 survey found at 67% of sampled funds, so a term sheet quoting 12% is either a strategy with a return profile to match or a concession bought elsewhere in the document. Three things the rate does not tell you decide what it is worth: whether it compounds, when accrual starts, and whether a catch-up restores the general partner to its full carry percentage once the hurdle is cleared.
Sources: ilpa-fund-terms-2021 · ilpa-model-lpa-wof-ts
What is a hurdle rate vs WACC?
A fund hurdle rate is a distribution threshold negotiated into the partnership agreement; the weighted average cost of capital is a discount rate a company computes from its own financing mix. They are not two versions of one idea. WACC is derived — it falls out of the capital structure and is used to discount cash flows and to set a corporate investment threshold. The fund hurdle is written down: it decides when carried interest becomes payable and it is worth whatever the parties agree it is worth. Treating the fund hurdle as a computed number imports a corporate-finance exercise into a clause that is a negotiated term.
Sources: ilpa-model-lpa-wof-ts · ilpa-fund-terms-2021
What is a good hurdle rate?
No standard-setter publishes a good hurdle rate, and this property does not name one. What is measured is prevalence rather than merit: ILPA's 2021 survey of fund terms found 8% at 67% of sampled funds and no hurdle at all at 16%, and ILPA's own model agreement leaves the rate bracketed rather than recommending a figure. A rate is only good against a specific strategy, hold period and call schedule, and against the drafting terms that decide what the stated rate actually accrues — compounding, accrual start date, and whether a catch-up follows. We publish the observed distribution and stop there.
Sources: ilpa-fund-terms-2021 · ilpa-model-lpa-wof-ts · states no value
What is a 10% hurdle rate?
A 10% hurdle rate means limited partners must receive a 10% annual return on their contributed capital before the general partner participates in profits. Two points above the 8% that ILPA's 2021 survey found at 67% of sampled funds is a real concession, but at a rate this size the compounding convention is worth arguing about first: 78% of waterfalls in that survey compound, and over a multi-year hold the gap between compounded and simple accrual on the same stated 10% is the same order of magnitude as the rate difference itself. Whether the general partner then catches up to its full carry percentage or is held to profit above the hurdle changes the outcome again.
Sources: ilpa-fund-terms-2021 · ilpa-model-lpa-wof-ts
What is TVPI vs MOIC?
TVPI is a defined performance measure and MOIC is not, which is the difference that matters before any comparison of the two figures. TVPI — total value to paid-in capital — is distributions plus residual value over capital actually paid in, computed the same way by anyone following recognised performance-reporting standards. MOIC has no standard-setter definition at all: it is used for gross and for net multiples, at the deal level and at the fund level, on invested and on committed capital. A MOIC and a TVPI quoted for the same fund can differ purely because of which of those choices was made, so a MOIC has to be read off the model that produced it.
Sources: gips-overview
What is a good TVPI for a venture fund?
No authoritative source publishes a venture fund TVPI benchmark, so this property states none. TVPI itself is defined by performance-reporting standards; what counts as good is a peer comparison against vintage year, strategy and stage, and the datasets that would settle it are proprietary and not verifiable from a citation. The figure is also not stable over a fund's life — early TVPI is mostly unrealized marks, so the same fund reports a very different number at year three and year ten. Read it beside DPI, which counts only cash that has actually been distributed.
Sources: gips-overview · states no value
What is the American waterfall distribution method?
The American waterfall distribution method runs the waterfall's tiers against each realized investment separately, so the test for whether the general partner is paid is applied deal by deal rather than once across the fund. The tier order is the same as any other waterfall — return of capital, preferred return, catch-up, residual split — and what changes is the denominator each tier is measured against. How much unreturned capital and how many write-offs from other deals are pulled into that test is the negotiated part of the structure, and it is what decides how early carry actually flows. Because the method pays before the fund's lifetime result is known, it is the one that requires a clawback.
Sources: ilpa-model-lpa-wof-ts · ilpa-model-lpa-wof · duanemorris-clawbacks
