- **American waterfall / deal-by-deal**:
- GP can receive **carry earlier**, after a profitable exit on an individual investment
- Better for GP cash flow
- Creates risk that later losses make early carry look overstated, so LPs usually want **strong clawback protections**
- Often seen as more **GP-friendly**
- **European waterfall / whole-fund**:
- LPs receive **all contributed capital back first** across the fund, and sometimes a pref, before GP gets carry
- Delays GP carry
- Simpler to explain to LPs and generally more **LP-friendly**
- Common for emerging managers
Practically, the tradeoff is **earlier GP payouts vs stronger LP downside protection**.
References:
- https://decilehub.com/base/1-general_questions/163729-why-does-the-lpa-have-different-options-for-how-carried-interest-is-distributed
- https://decilehub.com/base/1-general_questions/163969-how-should-an-emerging-manager-think-about-choosing-between-an-american-waterfall-and-a-european-waterfall-when-structuring-carried-interest
- GP can receive **carry earlier**, after a profitable exit on an individual investment
- Better for GP cash flow
- Creates risk that later losses make early carry look overstated, so LPs usually want **strong clawback protections**
- Often seen as more **GP-friendly**
- **European waterfall / whole-fund**:
- LPs receive **all contributed capital back first** across the fund, and sometimes a pref, before GP gets carry
- Delays GP carry
- Simpler to explain to LPs and generally more **LP-friendly**
- Common for emerging managers
Practically, the tradeoff is **earlier GP payouts vs stronger LP downside protection**.
References:
- https://decilehub.com/base/1-general_questions/163729-why-does-the-lpa-have-different-options-for-how-carried-interest-is-distributed
- https://decilehub.com/base/1-general_questions/163969-how-should-an-emerging-manager-think-about-choosing-between-an-american-waterfall-and-a-european-waterfall-when-structuring-carried-interest