Distribution waterfall

CFA Level II
#1

What is distribution waterfall?

#2

Prior to the general partner receiving interest, the limited partners will receive their distributions first. It can be structured so it occurs after every deal or it can be based on the total return of the portfolio.

#3

Distribution waterfall is the politically correct way of saying “Makin’ it Rain.” Limited partners get their return first, then the GP will get whatever is left. In some cases a deal is a winner and the GPs make out like bandits. Similar to LP = Preferred stockholders and GP = Common stockholder.

#4

Thanks. A bit confused with the difference between the characteristics and rights of LPs and GPs…

#5

i think you guys may have this backwards, for example QuantJock- how does the GP get whats left? What is it thats left after the LPs get their return? Shouldnt they get whats left after the GP? ie-the fund gets over its hurdle rate or whatever, earns 10% instead of 8%, with that 2% excess the GP gets carried interest of 20%, then the leftovers are entirely distributed to the LP. agree/disagree?

#6

tvPM Wrote: ------------------------------------------------------- > i think you guys may have this backwards, for > example QuantJock- > how does the GP get whats left? What is it thats > left after the LPs get their return? Shouldnt they > get whats left after the GP? > > ie-the fund gets over its hurdle rate or whatever, > earns 10% instead of 8%, with that 2% excess the > GP gets carried interest of 20%, then the > leftovers are entirely distributed to the LP. > > agree/disagree? I agree, but then it wouldn’t be a distribution waterfall.

#7

Haha, you’re right! Right way, and CFA way. On the CAIA exam, the distribution waterfall was explained as such where LP had limited upside gain/downside loss, and the GP would only receive the big bucks once the ‘perf’ was met. I feel worse and worse about L2 everyday. Back to review.

#8

true- i think the key is that LPs get the money the put in back first, then over that amount it flows between the GP and LP depending on the terms. if LP put in 1m and fund earned 2m, they get the 1m back, then the GP gets 20% of the remaining 1m(200k) and the LP gets 800k more. true?

#9

tvPM Wrote: > > if LP put in 1m and fund earned 2m, they get the > 1m back, then the GP gets 20% of the remaining > 1m(200k) and the LP gets 800k more. > > true? Over what time period is this return?

#10

tvPM Wrote: ------------------------------------------------------- > true- > i think the key is that LPs get the money the put > in back first, then over that amount it flows > between the GP and LP depending on the terms. > > if LP put in 1m and fund earned 2m, they get the > 1m back, then the GP gets 20% of the remaining > 1m(200k) and the LP gets 800k more. > > true? YES