What should an investor verify first?

The exact waterfall sequence — return of capital, hurdle, catch-up, and carry split — in writing.

Which documents matter most?

The PPM's distribution waterfall clause, read directly rather than summarized as '2 and 20.'

What is the main downside to test?

Accepting the headline fee structure without working through a numerical example of actual proceeds allocation.

How should the final decision be made?

Model at least one worked example with realistic numbers before relying on the headline fee structure.

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What Is a Distribution Waterfall?

Janvi Bhalla1 min read

Understanding the Return Path

A distribution waterfall is the contractually defined order in which realisation proceeds are allocated: typically return of capital to investors first, then a hurdle return, then a manager catch-up, and finally carried interest split between manager and investors on remaining profit.

Reading Waterfalls, Distributions and Exit Timing

The exact sequence and thresholds directly determine how much of a given realisation reaches investors versus the manager — two funds with an identical headline '2% and 20%' fee structure can produce meaningfully different investor outcomes depending on their specific waterfall mechanics.

Where Liquidity Expectations Break

The common failure is accepting the headline fee structure without working through the waterfall with actual numbers. A worked example — say, ₹1 crore invested, realised at ₹1.8 crore — reveals exactly how much reaches the investor at each stage, in a way the headline percentages alone do not.

Making the Cash-Flow Decision

Before committing, request the fund's exact waterfall structure in writing and run at least one worked example with realistic numbers to see the actual investor payout at different total-return scenarios.

A distribution waterfall is only truly understood once worked through with real numbers — headline fee percentages alone don't reveal how proceeds actually split.

Key takeaways

The waterfall is the contractual order proceeds flow through: capital return, hurdle, catch-up, then carry split.
Identical headline '2 and 20' fee structures can produce meaningfully different outcomes based on waterfall mechanics.
A worked numerical example reveals actual investor payout in a way headline percentages don't.
Request the exact waterfall structure in writing and model it before committing.

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