Financial Planning
Distribution Waterfall: A Simple Private-Fund Example
Follow a simple distribution waterfall through return of capital and a profit split, then test a lower-proceeds scenario.
What you will learn
- Read a provided distribution sequence without assuming universal terms.
- Calculate a simplified return-of-capital and profit split.
- Identify when a hurdle or catch-up needs a different model.
A distribution waterfall is the order used to allocate proceeds among a fund’s investors and manager under its documents. To understand one, follow the stated sequence, keep cumulative amounts visible and check that allocated proceeds equal the cash available.
Start with the actual sequence
Terms such as return of capital, preferred return, catch-up and carried interest describe possible steps, not a single formula used by every fund. Whole-fund and deal-by-deal approaches can recognize amounts at different times. ILPA’s fund-economics principles discuss waterfall structure and transparency; the governing arrangement determines the actual calculation.
Define the fictional rules completely
This exercise has $5 million of total contributed capital and $8 million of final available cash. Its invented rules are: first return all $5 million of contributed capital to LPs; then split the remaining profit 80% to LPs and 20% to the GP. There is no hurdle, catch-up, tax withholding, prior distribution or outstanding expense. No future value remains.
The assumptions deliberately exclude common complications. Use them to learn the order, not to infer what an actual fund owes.
Run the waterfall from top to bottom
A fully realized simplified waterfall
| Step | Available cash before step | Allocation | Cash remaining |
|---|---|---|---|
| 1. Return contributed capital | $8.0M | $5.0M to LPs | $3.0M |
| 2. Split remaining profit | $3.0M | $2.4M to LPs; $0.6M to GP | $0 |
| Total | $8.0M | $7.4M to LPs; $0.6M to GP | $0 |
LPs receive $5M + 80% × $3M = $7.4M. The GP receives 20% × $3M = $0.6M. The total is $8M. Applying 20% to the whole $8M instead would ignore the assumed capital-return step and overstate carry by $1M.
Test a lower-proceeds case
If only $4 million were available under the same rules, all $4 million would go toward the $5 million capital-return step. LPs would still be $1 million short of returned contributed capital, and the simplified model would allocate no carry. This is a consequence of the stated example, not a rule for every deal or agreement.
A preferred-return step would require its accrual base, rate, timing and treatment. A catch-up needs its own allocation sequence. Prior distributions, escrow and clawback can also change a cumulative result. Do not fill missing terms with a market convention.
Copy a waterfall review card
Waterfall inputs and checks
Fund / class / investor scope / currency: [ ]
Available distributable proceeds: [ ]
Capital to return / prior returns: [ ]
Each step in contractual order: [ ]
Hurdle basis / dates / convention, if any: [ ]
Catch-up / profit split / carry: [ ]
Escrow / clawback / open interpretation: [ ]
Cumulative allocation by recipient: [ ]
Check: allocations + unallocated = available cash: [ ]Have the responsible administrator explain the model against the documents. An arithmetic check can identify a missing dollar, but it cannot decide an ambiguous legal entitlement.
Use the result to ask a sharper question
Bring the sequence and unresolved line to the discussion, not a single unexplained carry percentage. Keep reviewed LP materials and next steps together with Finta’s LP follow-up workflow. For startup-security exit preferences, use the separate liquidation-preference lesson rather than mixing the two waterfalls.
About this lesson. By Finta Editorial Team. Sources reviewed November 14, 2026. All example amounts, entities and outcomes are fictional teaching inputs, not observed fund performance. General education, not legal, tax, accounting or investment advice. Use qualified advisers and the governing documents for an actual fund.