The distribution waterfall is the order, fixed in the limited partnership agreement, in which a fund's cash proceeds are paid out: first returning limited partners' capital and costs, then a preferred return, then a GP catch-up tranche, then the residual profit split as carried interest between the limited partners and the general partner.
Two structures do the same job differently. A whole-fund ("European") waterfall tests the GP's carry entitlement against the fund's cumulative results before any carry is paid, so a loss on one deal is netted against a gain on another before the GP sees a dollar of profit share. A deal-by-deal ("American") waterfall instead lets the GP take carry as each investment is realized, ahead of confirming how the fund performs overall — faster for the GP, but it creates the risk that early winners pay out carry a later loser then makes too large in hindsight. That risk is exactly what a clawback provision exists to correct.
The waterfall is one of the most heavily negotiated sections of the LPA, and the CVCA's ILPA-based model limited partnership agreement is the reference document most Canadian GPs and LPs start that negotiation from — which is why the same tier structure recurs across otherwise unrelated funds even though the percentages inside it are set fund by fund.
Maple Ridge Capital Fund II, LP realizes $50,000,000 on an exit. Its own LPA sets the waterfall as: (1) return the $30,000,000 of called capital tied to that investment; (2) pay limited partners an 8% preferred return, $2,400,000, before any carry is tested; (3) route the next $600,000 entirely to the GP as a catch-up, which brings its cumulative share to exactly 20% of the $3,000,000 distributed as profit so far; (4) split the remaining $17,000,000 80% to limited partners ($13,600,000) and 20% to the GP ($3,400,000). Across the whole $20,000,000 of profit on this exit, the GP ends up with $4,000,000 — 20% — which is the check that confirms the waterfall's tiers were built correctly. These percentages are this fund's own negotiated terms; every Canadian LPA sets its own, and no external source publishes a standard rate.
See also: GP catch-up · Clawback provision · Limited partnership agreement.
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