Distribution Waterfall

A distribution waterfall is a framework used in private investment funds to determine the sequence and priority of how profits or proceeds are allocated between limited partners (LPs) and general partners (GPs). It outlines specific tiers or thresholds that must be met before moving to the next stage of distribution, ensuring that investors receive returns in a structured manner.

Typically, the waterfall begins with the return of capital to LPs, followed by a preferred return, which guarantees LPs a minimum rate of return before profits are shared. After these obligations are met, remaining proceeds are divided according to agreed-upon splits, often favoring GPs through performance incentives like carried interest.

In the context of family office software, understanding and tracking distribution waterfalls is crucial for managing private fund investments, ensuring compliance with agreements, and accurately calculating returns for stakeholders.