A distribution waterfall is the framework that governs how investment proceeds are allocated among stakeholders in a private equity, venture capital, or real estate fund. It establishes the sequence and proportion in which returns flow to Limited Partners (LPs) and the General Partner (GP), and is a central feature of the Limited Partnership Agreement (LPA).

Waterfall structures are designed to align incentives and ensure that LPs are compensated before the GP participates in the upside. While structures vary across funds, most follow a common sequence:

• Return of Capital: LPs receive back their contributed capital before any profits are shared.

• Preferred Return (Hurdle): LPs are then paid a preferred annual return—typically 7–9%—on their invested capital.

• Catch-Up: Once the preferred return is met, the GP may receive a larger portion of the next profits—often 100%—until the profit split aligns with the agreed terms.

• Carried Interest: After the catch-up, remaining profits are shared according to the carried interest structure—commonly 80% to LPs and 20% to the GP.

The distribution waterfall provides a clear, pre-agreed formula for value-sharing that underpins transparency, trust, and performance alignment throughout the life of the fund.