In brief
An equity waterfall allocates distributable cash under the partnership agreement. State the order of capital recovery, preferred return, catch-up and promote tiers before calculating returns. Timing matters: identical total proceeds can produce different IRRs. A simple whole-deal calculator is useful for comparison, but individual agreements may compound preference, use different hurdles or impose clawbacks that require a dedicated model.
Key takeaways
- An equity waterfall allocates distributable cash under the partnership agreement.
- Reconcile the inputs to source records and make assumptions explicit.
- Use the result to frame questions, not as an assurance conclusion.
Read the agreement before building tiers
State contributions, capital return order, who earns preference, whether it compounds and which hurdle drives each tier. A whole-deal waterfall differs from deal-by-deal distributions. Document catch-up and clawback terms. The browser tool uses simple accrued LP preference and a cumulative profit-to-contributed-capital hurdle, not IRR promote hurdles.
Illustrative worked example
With $1 million equity and $1.2 million cash, capital return consumes $1 million; only $200,000 remains for preference, catch-up and promote.
Catch-up changes profit allocation
An optional GP catch-up directs cash to the GP until its target share of cumulative profits is reached. It is not the same as the ongoing promote split. Capital returned to either partner is not profit and must be excluded when calculating a catch-up target.
Illustrative worked example
After $80,000 LP preference, a 20% GP target requires $20,000 GP catch-up under a full catch-up convention, because $20,000 is 20% of $100,000 total profit.
Report dated returns and cash conservation
IRR accounts for timing; equity multiple does not. Use dated contributions and distributions and check that LP plus GP allocations equal distributable cash for every event. Certain cash-flow patterns have no unique IRR. A zero contribution makes an equity multiple undefined, not infinite evidence of performance.
Illustrative worked example
A $100,000 contribution and $120,000 distribution exactly one 365-day year later has 20% IRR and a 1.2× multiple.
Frequently asked questions
Educational content — not an audit, assurance opinion, or investment or legal advice.
