## Private Equity Waterfall Mechanics

The distribution of proceeds in a private equity fund is dictated by a structure known as the 'Waterfall'. This determines how and when Limited Partners (LPs) and General Partners (GPs) receive cash upon an exit.

### The Four Standard Tiers

1. **Return of Capital**: 100% of proceeds go to LPs until they have recouped their initial investment.
2. **Preferred Return**: LPs receive 100% of proceeds until they hit a specific IRR hurdle (typically 8%).
3. **GP Catch-up**: After the hurdle, the GP receives a concentrated amount of profits until they equate to 20% of the total profits distributed so far.
4. **Carried Interest**: All remaining proceeds are split, typically 80% to LPs and 20% to GPs.

### Strategic Importance of Hurdle Rates

A hurdle rate ensures that GPs only receive performance fees if they outperform a baseline return. This aligns incentives, ensuring that GPs are not rewarded for simply matching the performance of a low-risk bond index. This tool models the 'Pro-Rata' distribution after capital return to simplify the visualization of carry impact.

### FAQ

**Q: What is 'American' vs 'European' Waterfall?**
A: In a European waterfall, the GP doesn't get carry until the LPs have their *entire* fund's capital returned. In an American waterfall, carry is calculated on a deal-by-deal basis, allowing GPs to get paid earlier.

**Q: Can a carry be 'clawed back'?**
A: Yes. If a GP receives carry on successful early deals but the later deals in the fund fail, LPs can trigger a 'Clawback' to reclaim overpaid carry.

**Q: How does MOIC differ from IRR?**
A: MOIC (Multiple of Invested Capital) counts the raw cash return, while IRR (Internal Rate of Return) accounts for the time it took to get that cash back.