“As a private equity fund analyst, you are asked to walk through how a distribution waterfall works — comparing the European (whole-fund) and American (deal-by-deal) waterfall structures, explaining the GP catch-up mechanism, and identifying when a clawback provision is triggered.”
As a private equity fund analyst, you are asked to walk through how a distribution waterfall works — comparing the European (whole-fund) and American (deal-by-deal) waterfall structures, explaining the GP catch-up mechanism, and identifying when a clawback provision is triggered.
Task: explain how capital flows through a private equity fund's distribution waterfall from investors down to the general partner's carried interest, and demonstrate how the American and European waterfall structures can produce different GP payouts — and different clawback outcomes — for the same underlying fund performance.
The fund below has two portfolio companies realized at different points in the fund's life.
| Line Item | Value |
|---|---|
| Total Committed / Invested Capital | $500m |
| Preferred Return (Hurdle) Rate | 8% (0.08) |
| Carried Interest Rate | 20% (0.20) |
| GP Catch-up Rate | 100% (1.00) |
| Deal A — Invested Capital | $250m |
| Deal A — Exit Proceeds (Year 2) | $500m |
| Deal A — Accrued Preferred Return | $40m |
| Deal B — Invested Capital | $250m |
| Deal B — Exit Proceeds (Year 5) | $200m |
| Deal B — Accrued Preferred Return | $40m |
GP Catch-up = [Carried Interest Rate / (1 − Carried Interest Rate)] × Preferred Return
Using this formula, compute the GP catch-up amount on a whole-fund basis.
Remaining Profit = Total Exit Proceeds − Return of Capital − Preferred Return − GP Catch-up; GP Carry = Remaining Profit × Carried Interest Rate; LP Share = Remaining Profit × (1 − Carried Interest Rate)
Using this formula, compute the total LP and GP distributions under the European waterfall.
Deal-Level Catch-up = [Carried Interest Rate / (1 − Carried Interest Rate)] × Deal Accrued Preferred Return; Deal-Level Carry = Deal-Level Catch-up + [(Deal Proceeds − Deal Invested Capital − Deal Accrued Preferred Return − Deal-Level Catch-up) × Carried Interest Rate]
Using this formula, compute the GP carry paid out on Deal A's exit in Year 2, before Deal B is realized.
Clawback = Cumulative GP Carry Received (American) − GP Carry Entitled (European, Whole-Fund Basis)
Assume:
Using these inputs, compute the clawback amount owed by the GP after Deal B's exit in Year 5.
Try answering out loud first — then reveal the model answer and compare.
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