Distribution Waterfall

Distribution waterfall is a method to assign investment returns and gains among limited partners and the sponsor of a fund.


Though waterfall schedules can be customized, usually the four tiers in a distribution waterfall are:

  • Return of capital(ROC) – 100% of the allocation price goes to the investors until they receive all of their initial invested capital.
  • Preferred return – 100% of future distributions go to investors until they obtain the preferred return on their investment. Generally, the preferred rate of return for this tier ranges between 7% to 9%.
  • Catch-up tranche – 100% of the distributions go to the fund sponsor until it obtains an assured percentage of profits.
  • Carried Interest – A specified percentage of distributions that the sponsor receives is termed as carried interest. The specified percentage in the fourth tier must match the specified percentage in the third tier.

This help page and the information contained herein is provided for informational and discussion purposes only and is not intended to be a recommendation for any investment or other advice of any kind, and shall not constitute or imply any offer to purchase, sell or hold any security or to enter into or engage in any type of transaction.

Investing in venture capital funds is inherently risky and illiquid. It involves a high degree of risk and is suitable only for sophisticated and qualified investors.