Waterfalls in plain English
Preferred return, catch-up, promote — with the money actually moving.
A waterfall is the order money leaves a deal. Everything else in a syndication document is commentary on this one clause.
The tiers, with real dollars
Say a deal distributes $100k this quarter, LPs put in $1M, and the structure is an 8% pref with a 70/30 split above it.
- Preferred return — LPs receive the first $80k (8% on $1M). The sponsor receives nothing yet. "Preferred" means first, not guaranteed.
- Catch-up (if the deal has one) — the sponsor takes the next slice until they hold their promised share of profits so far.
- The split — whatever remains divides 70/30.
What to actually check
- Is the pref cumulative? If a bad year skips it, does it accrue?
- Is it pref on capital or pref on capital plus accrued pref?
- Does the promote calculate deal-by-deal or on the whole fund?
Each of those words moves real money from one pocket to the other. That is why this entry sits at Year 12 — read it before you sign your first LP check, from either side of the table.
One more honesty for the LP side, because glossaries shouldn't launder risk: the waterfall orders distributions — it does not create them. In a deal that underperforms, there may be nothing to order: syndications fail, capital calls happen, and "8% pref" on offering documents has never once guaranteed 8% in a bank account. The waterfall's real diligence value is what it reveals about alignment — a sponsor paid mostly above the pref is betting alongside you; one paid mostly in fees regardless of outcome has already been paid. Read the clause, then read the person.