The LPA offers different carry distribution options because managers and LPs balance incentives differently.
- **American / deal-by-deal carry** lets the GP receive carry earlier, after individual profitable exits
- **European / whole-of-fund carry** makes LPs get their contributed capital back first across the fund before carry is paid
- European is generally **more LP-friendly**
- American can be **more GP-friendly**, but often needs stronger clawback protections if later deals underperform
Different funds choose based on LP expectations, manager track record, and negotiation leverage. For emerging managers, European waterfalls are common because LPs usually want stronger downside protection.
Reference:
- https://decilehub.com/base/166-general/163582-summary-of-lpa-queries-spvs-lp-lock-up-and-american-vs-european-carry
- **American / deal-by-deal carry** lets the GP receive carry earlier, after individual profitable exits
- **European / whole-of-fund carry** makes LPs get their contributed capital back first across the fund before carry is paid
- European is generally **more LP-friendly**
- American can be **more GP-friendly**, but often needs stronger clawback protections if later deals underperform
Different funds choose based on LP expectations, manager track record, and negotiation leverage. For emerging managers, European waterfalls are common because LPs usually want stronger downside protection.
Reference:
- https://decilehub.com/base/166-general/163582-summary-of-lpa-queries-spvs-lp-lock-up-and-american-vs-european-carry