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Private Equity Waterfall: Distribution Mechanics

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The Palgrave Encyclopedia of Private Equity

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Synonyms

Carried interest; Carry; Catch-up provision; Compensation; Fees; Hurdle; Waterfall

Description

The private equity waterfall is a mechanism that governs the distribution of returns among the participants in private equity partnerships. The distribution process is known as the “waterfall” as it cascades in steps. These steps typically are (i) return of capital, (ii) hurdle rate, (iii) catch-up, and (iv) carried interest. There are two types of waterfalls, the “European waterfall” and the “American waterfall.” The main difference relates to the timing of carry payments to general partners. The waterfall is an important mechanism in compensation arrangements between limited partners and general partners and has been designed with the intention to align interest between limited partners and general partners.

Introduction

This chapter describes the private equity waterfall mechanism and reviews the literature on private equity waterfall. Private equity compensation typically...

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References

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Author information

Authors and Affiliations

  1. University of Oxford; Harvard University, Cambridge, MA, USA

    Wayne Lim

Authors
  1. Wayne Lim
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Corresponding author

Correspondence to Wayne Lim .

Editor information

Editors and Affiliations

  1. Florida Atlantic University, Boca Raton, FL, USA

    Douglas Cumming

  2. Lancaster University Management School, Lancaster, UK

    Benjamin Hammer

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© 2024 The Author(s), under exclusive licence to Springer Nature Switzerland AG

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Lim, W. (2024). Private Equity Waterfall: Distribution Mechanics. In: Cumming, D., Hammer, B. (eds) The Palgrave Encyclopedia of Private Equity. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-38738-9_155-1

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  • DOI: https://doi.org/10.1007/978-3-030-38738-9_155-1

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  • Publisher Name: Palgrave Macmillan, Cham

  • Print ISBN: 978-3-030-38738-9

  • Online ISBN: 978-3-030-38738-9

  • eBook Packages: Springer Reference Economics and FinanceReference Module Humanities and Social SciencesReference Module Business, Economics and Social Sciences

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