🗽 Stars, Stripes, and Carried Interest

A quick dive into American distribution waterfalls

🎉 Happy Fourth, Funds Family!

Hope you’re having a restful Independence Day. We meant to continue our series negotiating co-GP deals this week. (If you missed Parts 1 and 2, go check them out here: 💼 Overview of 15 Key Co-GP Deal Terms and 💼 Structuring the Capital Partner’s Capital Commitments.)

But we’ve been busier than expected heading into the holiday weekend. And we’re feeling a little patriotic. So instead of diving into co-invest mechanics, we’re hitting pause on the co-GP series this week to discuss something distinctly American: The American Waterfall. (Cue The Star-Spangled Banner.🎺)

But first…

/ SELF PROMOTION

If you’re a sponsor (GP) raising an investment fund or syndication in private equity, private credit, real estate, or venture capital, we may be a good fit for you. We also represent limited partners (LPs) investing in funds and syndications.

Thanks for reading, now let’s jump into the article 😃 

🦅 The American Waterfall

Whether you're a GP or an LP, it's one of those terms you've probably heard before. But it’s often misunderstood.

So today, we’re sharing two quick reads that break it down for you.

📘 1. American vs. European Waterfalls

This is the foundational one. It explains why a “deal-by-deal” model (aka the American waterfall) is generally more favorable to the GP than the “netted” or “crossed” European model. The article includes examples and diagrams to help it all click.

💡 Key Takeaway: The American waterfall allows GPs to receive carry sooner, but it also increases clawback risk and is less common in today's market.

📘 2. Loss Carryforwards in American Waterfalls

This one goes deeper. Not all American waterfalls are the same. The inclusion (or not) of a “loss carryforward” clause makes a big difference in how much carry the GP actually earns. This article walks through real-world examples so you can see the math in action.

💡 Key Takeaway: Adding a loss carryforward clause makes American waterfalls more LP-friendly and marketable, especially for sophisticated investors.

By the way…

Just to be clear: we’re playing it up a bit for the Fourth. The “American” waterfall isn’t really about geography these days. It’s just a name for a distribution style in fund economics, and ironically, most U.S.-based funds today use the European model. (Read more about the differences between European and American waterfalls here: 🛠️ How Investment Fund Carried Interest Works (Part 2).) Still, it felt like the right week to give it a little extra spotlight. 🧨

/ WRAPPING THE CASE

  1. American waterfalls distribute profits deal-by-deal, often accelerating carried interest to the GP.

  2. Including a loss carryforward clause makes the distribution waterfall more LP-friendly.

  3. Despite the name, most U.S. funds actually use European waterfalls. (But hey, it’s the Fourth).

Thanks for reading, everyone.

Have a great weekend! 🙌 

/ JURY TRIAL

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⚠️ Note: This newsletter is for informational purposes only and nothing should be considered legal advice. For that, hire a lawyer! I am a lawyer, but not your lawyer (unless I actually am your lawyer because you’ve signed an engagement letter and we’re working together). This newsletter may be considered attorney advertising.

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