Distribution Waterfalls in AIFs – Who Gets Paid First and Why

“Waterfall” isn’t jargon—it’s the sequence determining how profits flow from an AIF to its investors and managers.

Typical Sequence
1️⃣  Return of Capital Contributed.
2️⃣  Preferred Return (e.g. 8 %).
3️⃣  Catch-up Phase (manager recovers agreed share).
4️⃣  Carry (20 % of residual profits).

European style pays carry only after all capital is returned; American style can pay deal-by-deal.

Investor Safeguards
Ensure claw-back clauses exist if later losses reverse earlier gains. Check if carry is escrowed until fund closure.

Key Takeaway: Waterfall language in your PPM defines your actual net returns—read it line by line.
 

Disclaimer: Educational only.