what is a distribution waterfall 
a distribution waterfall is a way to allocate investment returns or capital gains among participants of a group or pooled investment commonly associated with private equity funds the distribution waterfall defines the pecking order in which distributions are allocated to limited and general partners usually the general partners receive a disproportionately larger share of the total profits relative to their initial investment once the allocation process is complete this is done to incentivize the fund s general partner to maximize profitability for its investors understanding distribution waterfallsa distribution waterfall describes the method by which capital is distributed to a fund s various investors as underlying investments are sold for gains essentially the total capital gains earned are distributed according to a cascading structure made up of sequential tiers hence the reference to a waterfall when one tier s allocation requirements are fully satisfied the excess funds are then subject to the allocation requirements of the next tier and so on though waterfall schedules may be customized generally the four tiers in a distribution waterfall are hurdle rates for the schedule also may be tiered depending on the total amount of carried interest of the general partners typically the more carried interest the higher the hurdle rate additionally a feature called clawback is frequently included in the fund prospectus and is meant to protect investors from paying more incentive fees than required in case of such an occurrence the manager is obligated to pay back the excess fees american vs european waterfall structuresinvestment waterfall mechanics are detailed in the distribution section of the private placement memorandum ppm there are two common types of waterfall structures american which favors the general partner and european which is more investor friendly 