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Distribution waterfall modeling

Waterfall calculator

Most waterfall calculators give you a number. The number is the least interesting part — anyone can multiply by twenty percent. What decides a negotiation is which tier the money stopped at, what the pref had compounded to by then, and whether the catch-up closed the gap or merely narrowed it. So this one shows the arithmetic, line by line, with the operands substituted, and you can check it with a pencil.

Everything computes in your browser. Nothing about the fund you are modelling leaves this page.

Structure

Fund terms

Hurdle and promote

Promote ladder

Tier 1% hurdle, carry%

On a full catch-up the two agree. On a partial catch-up they do not: measured against the pref, the GP never quite reaches its carry percentage of profit.

Investments

Year 0 is the first close.

InvestmentCapitalInvested yearProceedsExit year

Deal-by-deal (American) — the split

LP distributions

$132.82M

$132,820,000.00

GP carried interest

$10.47M

$10,469,387.76

GP capital returned

$2.71M

$2,710,612.24

LP multiple

1.35x

on $98,400,000.00 contributed

Capital contributed
$100,408,163.27
Proceeds realized
$146,000,000.00
Fund profit
$45,591,836.73
Fund multiple
1.45x
Management fee, gross
$20,408,163.27
Fee offset applied
$0.00
Fee offset unapplied (residual rebate)
$0.00
Management fee, net
$20,408,163.27
Preferred return accrued
$65,457,993.84
Preferred return unpaid
$51,884,480.96
Capital never returned
$6,755,102.04
GP share of profit
22.96%

Clawback — triggered

Carry taken

$10,469,387.76

Whole-fund entitlement

$9,118,367.35

Repayable, gross of tax

$1,351,020.41

carry taken $10,469,388 - whole-fund entitlement on the same cashflows $9,118,367 = $1,351,020 repayable gross of taxes; at an assumed 37% marginal rate a net-of-tax formulation would return $851,143.

Repayable, net of tax

$851,142.86

The gap between these two figures is the negotiation.

The arithmetic, line by line

Every operand is the number actually used. Nothing below is rounded before it is computed.

Deal 1 realized · year 5

$90,000,000.00 distributed

  1. Cost basis to recover before carry

    $30,000,000 invested + $7,653,061 allocated fees (37.5% of $20,408,163) + $0 unrecovered prior cost = $37,653,061

    WF-02 · WF-08 · FE-01

    $37,653,061.22

  2. Preferred return accrual, year 1 to 5

    $37,653,061 x [(1 + 8%/1)^(1 x 4y) - 1] = $13,573,513

    WF-13 · WF-17 · FM-02

    $13,573,512.88

  3. Return of this deal's cost basis

    min($90,000,000 available, $37,653,061 unreturned) = $37,653,061

    WF-02 · WF-08

    LP $36,900,000.00

    GP $753,061.22

  4. Preferred return

    min($52,346,939 available, $13,573,513 accrued pref) = $13,573,513

    WF-09 · WF-13 · FM-02

    LP $13,302,042.62

    GP $271,470.26

  5. GP catch-up (full, 100%)

    target = 20%/(1 - 20%) x $13,573,513 pref paid = $3,393,378; still owed $3,393,378; at a 100% catch-up rate that consumes $3,393,378, capped by $38,773,426 available = $3,393,378

    WF-21 · WF-22 · FM-03

    LP $0.00

    GP $3,393,378.22

  6. Residual split 80% / 20%

    $35,380,048 x 20% to GP = $7,076,010; $35,380,048 x 80% to investors = $28,304,038

    WF-11

    LP $27,737,957.38

    GP $7,642,090.30

Deal 2 realized · year 8

$12,000,000.00 distributed

  1. Cost basis to recover before carry

    $30,000,000 invested + $7,653,061 allocated fees (37.5% of $20,408,163) + $0 unrecovered prior cost = $37,653,061

    WF-02 · WF-08 · FE-01

    $37,653,061.22

  2. Preferred return accrual, year 2 to 8

    $37,653,061 x [(1 + 8%/1)^(1 x 6y) - 1] = $22,097,615

    WF-13 · WF-17 · FM-02

    $22,097,614.81

  3. Return of this deal's cost basis

    min($12,000,000 available, $37,653,061 unreturned) = $12,000,000

    WF-02 · WF-08

    LP $11,760,000.00

    GP $240,000.00

  4. Unrecovered cost carried to the next exit

    $37,653,061 basis - $12,000,000 recovered = $25,653,061 made up at the next realization

    WF-02 · VC-01

    $25,653,061.22

Deal 3 realized · year 9

$44,000,000.00 distributed

  1. Cost basis to recover before carry

    $20,000,000 invested + $5,102,041 allocated fees (25% of $20,408,163) + $25,653,061 unrecovered prior cost = $50,755,102

    WF-02 · WF-08 · FE-01

    $50,755,102.04

  2. Preferred return accrual, year 3 to 9

    $50,755,102 x [(1 + 8%/1)^(1 x 6y) - 1] = $29,786,866

    WF-13 · WF-17 · FM-02

    $29,786,866.15

  3. Return of this deal's cost basis

    min($44,000,000 available, $50,755,102 unreturned) = $44,000,000

    WF-02 · WF-08

    LP $43,120,000.00

    GP $880,000.00

  4. Unrecovered cost carried to the next exit

    $50,755,102 basis - $44,000,000 recovered = $6,755,102 made up at the next realization

    WF-02 · VC-01

    $6,755,102.04

Take this with you

The link carries the numbers and drops the labels — paste it into a deal thread without disclosing what you are looking at. The calculator is free and stays free; an email is only how you get a copy sent to you, and it is stored on our own infrastructure.

Methodology

The model runs on total partner capital. LP and GP commitments are pooled, the preferred return accrues on the pool, and every investor-side tier splits pro rata by commitment before carry is paid on top — so the general partner's own money is never quietly counted as promote. Management fees are drawn ratably across the fee years and start accruing pref when they are called, because ILPA's position is that the pref runs from the date capital is at risk.

In the deal-by-deal model, each exit recovers its own cost, the fees allocated to it pro rata by invested cost, and the unrecovered cost of any earlier write-off. That makeup rule is ILPA's prescription for non-whole-fund waterfalls, and it is the reason a fund can run deal-by-deal without generating a clawback at all — until a late loser arrives after the carry has been paid and spent.

Two limits are worth stating plainly. The catch-up is applied to the first tier only: the ILPA Model LPA and the academic treatment both describe a single catch-up against the preferred return, and no verified source specifies how one behaves on the second and third rungs of a ratcheted promote, so higher tiers here are pure splits. And the model does not simulate interim carry, tax distributions, escrow funding, or the effect of a subscription line on when the pref clock starts — each of which moves real money and none of which is settled by a single convention.

The waterfall computes cash. It does not compute tax. Section 1061 recharacterizes long-term capital gain on an applicable partnership interest as short-term where the three-year holding period is not met, measured on the asset rather than the fund's life — so a deal exited inside three years can convert carry to short-term gain without changing a single line above. Reconcile any output here to the governing agreement, the capital account ledger, and the partnership's allocations before it becomes a distribution notice.

What the market repeats, and what the sources actually say

Several of the inputs above are routinely described as standards. They are not. Each note below travels with the calculator field it qualifies.

Contested

8% is a survey finding, not a standard

No standard-setter publishes a preferred return rate. ILPA's glossary defines the preferred return with no percentage attached, and the figure does not appear in Principles 3.0. The number people repeat traces to ILPA's 2021 Private Fund Terms survey, which found 8% at about two thirds of the funds it sampled. Cite it that way — named survey, publisher, sample, year — or not at all, and note the same survey put roughly one fund in six at no hurdle whatsoever. The field is pre-filled at 8% because a calculator has to start somewhere, not because 8% is owed to anyone. Replace it with the rate your agreement actually says.

Recommended position

The ILPA model compounds annually, calculated daily

The ILPA Model LPA specifies an annual rate compounded annually and calculated daily on the contribution, running from receipt until distribution. ILPA's 2021 survey put compounded prefs at roughly 78% of waterfalls, so simple accrual is a real minority convention rather than an error. On a long hold the choice is worth several points of carry.

Recommended position

No catch-up is a hard hurdle, and ILPA prefers it

ILPA states the position directly: basing carry only on the portion of profits exceeding the preferred return fosters greater alignment. Turn the catch-up off and you are modelling that hard hurdle. Turn it on and you are modelling what the market calls a soft hurdle — a term borrowed from hedge funds that no private-equity authority defines, which is why this tool labels the mechanic rather than the slang.

Cited benchmark

80% and 100% are both evidenced; 50% is not

The ILPA Model LPA's own catch-up rate is 80%. US drafting practice commonly uses 100%, where the GP takes every post-hurdle dollar until it reaches its carry percentage of profits. Fifty-percent catch-ups are practitioner-common and appear in no verified source, so if you model one, do not attach a citation to it.

Market vernacular

"2 and 20" is vernacular, and ILPA's glossary contradicts half of it

No authority states a carry percentage. ILPA's glossary describes the management fee as a percentage "e.g., 1-2%" of committed or invested capital — a range with 2% at the ceiling — and gives no carry figure at all. Twenty percent is what many agreements say; it is not what any standard requires.

Recommended position

ILPA prescribes a 100% offset; the market runs 60-100%

ILPA's body text is categorical — portfolio company fees that are charged should be 100% offset against the management fee. ILPA's own glossary then describes the market as typically 60-100%, with 100% preferred by LPs. An 80% offset is legacy drafting. There is no federal requirement here: the rule people half-remember came from the SEC's Private Fund Adviser Rules, which were vacated.

Market vernacular

"European" and "American" appear nowhere in ILPA Principles

ILPA uses different words entirely: the preferred structure "distributes all committed capital back to LPs before the GP begins to accrue carried interest, also known as a whole of fund waterfall structure," and it calls all-contributions-plus-preferred-return-back-first best practice. The geographic labels are market shorthand. Whole-fund is the dominant structure globally and least dominant in North America, which is exactly why the clawback view below matters.

Recommended position

ILPA says clawbacks are gross of taxes

The tool shows both figures because agreements are drafted both ways, but ILPA's position is unambiguous: clawback amounts should be gross of taxes paid, repaid no later than two years after the liability is recognized. Where a net-of-tax formulation is used, ILPA expects the hypothetical rates to reflect the affected partners' actual marginal rates. ILPA also expects accrued carry to sit in escrow at 30% of carry distributions or more, which this model does not simulate.

Contested

The waterfall computes cash, not tax

Section 1061 recharacterizes long-term capital gain on an applicable partnership interest as short-term where the three-year holding period is not met — measured on the asset, not on the fund's life, so a deal exited inside three years can convert carry to short-term gain even when every other line of this model is unchanged. Section 1061 also does not reach a genuine capital interest, and a GP commitment funded by a management fee waiver fails that test. None of this changes a dollar in the tiers above; all of it changes what the recipient keeps.

Recommended position

The pref should run from the date capital is at risk

ILPA's position is that the preferred return is calculated from the date capital is called to the point of distribution — and where a subscription line collateralized by uncalled commitments funds the investment, from the date the capital is at risk rather than the date the LPs are drawn. A fund that leaves a sub line outstanding for a year and starts the pref clock late has moved carry from the LPs to itself without changing a single stated term. This model starts the clock when capital is called.

Sources

  • ILPA Private Equity Principles 3.0

    Institutional Limited Partners Association

    Whole-of-fund distribution as ILPA's stated best practice; hard hurdle recommendation; clawback gross of taxes; escrow of 30% or more of carry distributions.

  • ILPA Model LPA (whole-of-fund term sheet and agreement)

    Institutional Limited Partners Association

    Preferred return defined as an annual rate compounded annually and calculated daily from receipt of the contribution; 80% catch-up rate; clawback tested at four measurement dates; LP giveback capped at the lesser of 30% of distributions and 25% of commitment.

  • ILPA Private Fund Terms study (2021)

    Institutional Limited Partners Association

    Survey evidence on preferred return rates, no-hurdle prevalence, compounded-pref prevalence, and interim clawback outcomes across the sampled funds.

  • 26 U.S.C. §1061 — Partnership interests held in connection with performance of services

    Office of the Law Revision Counsel, U.S. House of Representatives

    Three-year holding period applied to applicable partnership interests, and the recharacterization of the excess as short-term capital gain.

  • T.D. 9945 — Final regulations under section 1061

    Internal Revenue Service / Federal Register

    Mechanics of the recharacterization amount, the capital-interest exception, and related-party transfer rules.

  • About Form 1065 and Schedule K-1

    Internal Revenue Service

    Partnership allocation and reporting context — the waterfall determines cash, the K-1 reports the allocation, and the two are not the same statement.

Questions

What is the difference between an American and a European waterfall?

A deal-by-deal (American) waterfall tests carry investment by investment, so the general partner can be paid on a winner before the fund as a whole has returned capital. A whole-fund (European) waterfall pays no carry until all contributions and the preferred return have gone back. On identical cashflows the two produce different carry, and the difference is what a clawback later corrects. Neither term appears in ILPA Principles 3.0, which uses "whole of fund" and calls all-contributions-plus-preferred-return-back-first best practice.

Is an 8% preferred return the industry standard?

No standard-setter publishes a rate. ILPA's glossary defines the preferred return with no percentage attached, and 8% does not appear in ILPA Principles 3.0. The figure people repeat comes from ILPA's 2021 Private Fund Terms survey, which found 8% at roughly two thirds of sampled funds and roughly one fund in six operating with no hurdle at all. Treat it as a survey finding with a named source, not a requirement.

How is a GP catch-up calculated?

The catch-up redirects post-hurdle proceeds to the general partner until it holds its carry percentage of profits. On a 20% carry with a full catch-up, the target is 20/80 of the preferred return paid: pay $8 of pref and the catch-up is $2, after which the GP has 20% of the $10 distributed. The ILPA Model LPA's own catch-up rate is 80%, not 100%, so the rate is a negotiated term rather than a default.

What triggers a GP clawback?

Carry paid on early winners that the fund's eventual losers erase. Measure the carry actually taken against the carry a whole-fund waterfall would have produced on the same cashflows; the excess is repayable. ILPA's position is that clawback amounts should be gross of taxes paid and repaid no later than two years after the liability is recognized, with accrued carry held in escrow at 30% of carry distributions or more.

Does a hard hurdle change the carry?

Materially. With no catch-up, carry applies only to profit above the preferred return: on $100 of profit with an $8 pref and 20% carry, the general partner receives 20% of $92, or $18.40, rather than $20. ILPA recommends that construction on the ground that basing carry only on profits exceeding the preferred return fosters greater alignment.

Does this calculator send my fund's numbers anywhere?

No. Every figure is computed in the browser. Nothing is transmitted unless you choose to email yourself a copy, and a share link carries the numbers with the deal labels stripped out.

Keep reading

Waterfall modelingCarry mechanicsFee structuresVesting and clawbackGP compensation