Author: Gert-Tom Draisma / www.TristanFinance.com

First published: 24th of September 2026

Latest update: 2nd of October 2026

Status: First Draft

Part I establishes the calculation framework on which the remainder of this chapter is built.

A carried-interest waterfall is ultimately a sequence of economic rules applied to a population of economic events. Before preferred returns, catch-ups, multiple hurdles, investor-specific economics or clawback can be calculated, the underlying calculation must answer several more fundamental questions:

• What is being calculated?
• At what economic level is it being calculated?
• Which cash flows and other economic events participate?
• How are those events classified?
• In what sequence are the waterfall rules applied?
• What balances must be carried forward from one calculation to the next?
• How is incremental carry derived from a cumulative economic position?
• How can the result be independently reconciled?

These questions may appear elementary. In practice, they determine whether a waterfall model is economically correct.

A spreadsheet can execute an incorrect interpretation perfectly. A system can reproduce the same incorrect result thousands of times. Deterministic execution is valuable only after the economics have been translated correctly into calculation rules.

The starting principle is therefore:

Calculation Accuracy ≠ Economic Correctness

A robust waterfall calculation requires:

Correct Economic Interpretation + Correct Data + Correct Calculation Sequence

Part I develops this foundation without initially introducing the additional complexity of time-based hurdles. The first examples deliberately use simple economics so that the mechanics of allocation, calculation state, cumulative calculations and reconciliation can be understood independently.

Later Parts will build on exactly the same principles.

1. From Economic Architecture to Calculation

Chapter 3 described the waterfall as an economic architecture.

Chapter 4 requires that architecture to become executable.

That transformation can be represented as:

Economic Rule → Calculation Rule → Required Data → Calculation → Result → Reconciliation

Each stage is distinct.

Consider the following economic rule:

Investors receive their relevant contributed capital before carried interest participates in distributions.

This statement cannot yet be calculated.

It first needs to become a calculation rule.

A simplified calculation rule might be:

Unreturned Capital = Relevant Contributions − Capital Previously Returned

For a new distribution:

Return of Capital Allocation = Lesser of Available Distribution and Unreturned Capital

or:

Return of Capital Allocation = min(Available Distribution, Unreturned Capital)

Once the rule has been expressed mathematically, the data requirements become apparent.

The calculation needs to know:

• relevant contributions;
• capital previously returned;
• the amount currently available for distribution; and
• potentially the economic population to which those amounts relate.

Only then can the calculation be executed.

1.1 A first waterfall

Assume:

• investors contribute €100 million;
• the fund subsequently distributes €160 million;
• investors must first receive €100 million of capital;
• all remaining profit is divided 80% to investors and 20% to carried interest;
• there is no preferred return.

The waterfall contains two tiers.

Tier 1 — Return of capital

Available distribution:

€160m

Unreturned capital:

€100m

Return of capital:

min(€160m, €100m) = €100m

Remaining distribution:

€160m − €100m = €60m

Tier 2 — Profit split

Remaining profit:

€60m

LP allocation:

€60m × 80% = €48m

Carry allocation:

€60m × 20% = €12m

Final result

LP:

€100m + €48m = €148m

Carry:

€12m

Reconciliation:

€148m + €12m = €160m

The calculation is elementary.

The important point is not the €12 million result. It is the sequence by which the result was obtained.

The carry percentage was not applied to the €160 million distribution.

It was applied only to the €60 million that remained after the first economic tier had been satisfied.

1.2 A mathematically correct but economically incorrect calculation

Suppose someone instead calculates:

€160m × 20% = €32m

There is nothing mathematically wrong with this calculation.

The error is the economic base.

The €100 million representing return of capital is not carry-bearing profit under the assumed waterfall.

Therefore:

Correct Percentage × Incorrect Economic Base = Incorrect Carry

This distinction becomes increasingly important as the economic perimeter becomes more complicated.

For example, a calculation can use the correct 20% carry percentage but still be wrong because it incorrectly includes or excludes:

• management fees;
• fund expenses;
• broken-deal expenses;
• recycled distributions;
• particular investments;
• particular investors;
• a parallel vehicle;
• a separate economic stream; or
• a remaining funding obligation.

The mathematics can be flawless while the answer remains wrong.

2. The Calculation Specification

Before building a waterfall model, it is useful to express the economics as a calculation specification.

A calculation specification answers, in an unambiguous manner, what the model is required to do.

For the simple waterfall above, the specification could be:

1. Determine relevant cumulative contributions.
2. Determine capital previously returned.
3. Calculate unreturned capital.
4. Allocate available distribution to unreturned capital.
5. Pass any excess distribution to the residual tier.
6. Allocate the residual 80% to the LP and 20% to carry.
7. Update the relevant balances.
8. Reconcile total allocations to the amount distributed.

This specification is more useful than simply stating:

The fund has 20% carry.

The latter describes only one parameter.

It does not describe the waterfall.

2.1 Parameters are not mechanics

Consider two funds.

Both have:

• 20% carry;
• €100m contributions;
• €160m distributions.

Fund A applies 20% carry after return of capital.

Fund B applies 20% carry only after return of capital and a €20 million hard hurdle.

Fund A:

Profit = €60m

Carry = €60m × 20% = €12m

Fund B:

Profit after capital = €60m

Hard hurdle = €20m

Carry-bearing excess:

€60m − €20m = €40m

Carry:

€40m × 20% = €8m

Both funds have "20% carry."

Yet:

Fund A Carry = €12m

Fund B Carry = €8m

Therefore:

Headline Carry Percentage ≠ Waterfall Specification

The calculation specification must describe the complete allocation sequence.

3. The Waterfall as an Ordered Sequence

A waterfall is ordered.

The order in which its rules are applied is part of the economics.

Suppose the waterfall requires:

1. return capital;
2. pay preferred return;
3. allocate catch-up;
4. divide the residual.

The calculation cannot arbitrarily perform step 4 before step 1.

This gives another fundamental principle:

Correct Inputs + Correct Rules + Wrong Sequence = Wrong Result

3.1 A simple example

Assume:

• €100m capital;
• €150m distribution;
• €20m preferred return;
• no catch-up;
• remaining value split 80:20.

Correct sequence:

Tier 1

Return capital:

€100m

Remaining:

€50m

Tier 2

Preferred return:

€20m

Remaining:

€30m

Tier 3

Carry:

€30m × 20% = €6m

LP residual:

€24m

Total LP:

€100m + €20m + €24m = €144m

Carry:

€6m

Now suppose the 80:20 split is incorrectly applied before the preferred return.

Profit after capital:

€50m

Initial 20% carry:

€10m

The model may then attempt to allocate €20 million preferred return to the LP from the remaining amount.

It can still arrive at allocations that add to €150 million.

The calculation can even reconcile arithmetically.

But it does not represent the contractual waterfall.

3.2 Reconciliation alone does not prove correctness

This is important.

A calculation can satisfy:

LP Allocation + GP Allocation = Total Distribution

and still be wrong.

Reconciliation proves that the value has been accounted for.

It does not prove that it has been allocated according to the correct economic rules.

Therefore:

Reconciled ≠ Economically Correct

Reconciliation is necessary.

It is not sufficient.

4. Waterfall Tiers

Most waterfalls can be understood as a series of allocation tiers.

Each tier has:

• an amount entering the tier;
• an economic condition;
• an amount required to satisfy the tier;
• an allocation rule;
• an amount consumed by the tier; and
• an amount, if any, passed to the next tier.

The generic calculation is:

Value Entering Tier − Value Consumed by Tier = Value Passed to Next Tier

Consider:

• distribution = €180m;
• capital to return = €100m;
• preferred return = €20m;
• GP catch-up = €5m;
• residual split = 80:20.

The waterfall can be represented as:

This representation will continue to work when the waterfall contains substantially more tiers.

For example:

Return Capital → Preferred Return → Catch-Up → 20% Carry Tier → Second Hurdle → Second Catch-Up → 25% Carry Tier → Third Hurdle → Super Carry

The number of tiers increases.

The underlying allocation logic does not change.

5. The Lesser-of Principle

A tier cannot allocate more value than is available.

Nor should it normally allocate more than is required to satisfy that tier.

Therefore, many waterfall tiers can be expressed using a lesser-of calculation:

Tier Allocation = min(Value Available, Amount Required by Tier)

5.1 Return of capital

Available distribution:

€30m

Unreturned capital:

€100m

Return of capital:

min(€30m, €100m) = €30m

Nothing reaches the next tier.

Remaining unreturned capital:

€70m

5.2 Distribution exactly satisfies capital

Available:

€100m

Unreturned capital:

€100m

Return of capital:

€100m

Remaining distribution:

€0m

Remaining unreturned capital:

€0m

No carry.

5.3 Distribution exceeds capital

Available:

€140m

Unreturned capital:

€100m

Return of capital:

€100m

Remaining:

€40m

The €40 million moves to the next tier.

5.4 Distribution stops inside a later tier

Assume:

• €100m unreturned capital;
• €20m preferred return;
• €115m distribution.

Return capital:

min(€115m, €100m) = €100m

Remaining:

€15m

Preferred return required:

€20m

Preferred return paid:

min(€15m, €20m) = €15m

Remaining distribution:

€0m

Unpaid preferred return:

€5m

Carry:

€0m

The waterfall has stopped inside Tier 2.

A model should not attempt to calculate Tier 3 merely because Tier 3 exists in the waterfall.

6. Exhaustion of Available Value

A waterfall should normally stop when there is no value left to allocate.

This may sound obvious, but it has important modelling consequences.

Consider a waterfall with seven tiers.

If all available value is consumed by Tier 3:

Tiers 4–7 receive zero

The model should not manufacture values merely to populate subsequent tiers.

This gives the general rule:

No Remaining Value → No Further Allocation

6.1 Example

Assume:

• distribution = €108m;
• return of capital requirement = €100m;
• preferred return requirement = €10m;
• subsequent catch-up and residual tiers.

Tier 1:

€100m

Remaining:

€8m

Tier 2:

Required:

€10m

Available:

€8m

Allocated:

€8m

Remaining:

€0m

Therefore:

• catch-up = €0m;
• residual carry = €0m.

The fact that the waterfall eventually provides for carry does not mean that carry exists at every level of performance.

7. Economic Events

Waterfalls operate on economic events.

A cash amount without an economic classification is often insufficient.

Consider five €10 million transactions:

1. €10m LP contribution;
2. €10m return of capital;
3. €10m recallable distribution;
4. €10m tax advance to the GP;
5. €10m distribution in kind.

They have the same numerical amount.

They do not have the same economic meaning.

Therefore:

Amount ≠ Economic Event

A useful conceptual representation is:

Economic Event = Amount + Date + Classification + Economic Population + Relevant Attributes

The relevant attributes depend upon the waterfall.

They can include:

• investor;
• investment;
• vehicle;
• share class;
• carry pocket;
• economic stream;
• currency;
• recallable status;
• realised/unrealised status;
• source of proceeds; and
• contractual economic date.

7.1 A simple event table

This table contains much more information than:

For a simple whole-fund waterfall, the second table might be sufficient.

For a deal-by-deal waterfall, it may not be.

The required data structure is therefore determined by the economics.

Economic Rules → Required Data Granularity

8. Cash Movement Versus Economic Classification

A cash movement and its waterfall treatment are not necessarily the same thing.

Suppose €20 million is distributed to investors.

That does not by itself tell us whether the €20 million:

• permanently reduces unreturned capital;
• is recallable;
• is recycled;
• represents income;
• belongs to a particular investment;
• belongs to a particular carry pocket; or
• participates in the relevant waterfall at all.

Likewise, an economic event can exist without immediate cash movement.

A distribution in kind is the obvious example.

If securities worth €20 million are distributed, the waterfall may recognise a €20 million distribution even though no €20 million cash payment occurred.

Therefore:

Cash Movement ≠ Economic Classification

and:

Economic Distribution ≠ Necessarily Cash Movement

This distinction becomes important later in the chapter when we consider recycling, distributions in kind, tax advances and unrealised carry.

9. Calculation Population

Every waterfall calculation operates over an economic population.

At the simplest level, the population may be:

The entire fund

But it can instead be:

• one investor;
• one class of investors;
• one investment;
• a group of investments;
• one parallel vehicle;
• several aggregated vehicles;
• one carry pocket;
• one economic stream; or
• another contractually defined grouping.

Before calculating, the model must therefore answer:

Over which economic population are these rules being applied?

This gives:

Economic Population → Relevant Events → Calculation State → Waterfall Result

9.1 Why population matters

Assume two investments:

Total:

• cost = €100m;
• proceeds = €125m;
• profit = €25m.

At a simple whole-fund 20% carry after return of capital:

Carry = €25m × 20% = €5m

If Investment A is instead calculated independently:

Profit A:

€100m − €50m = €50m

Carry:

€50m × 20% = €10m

Investment B generates no carry.

The difference is:

Whole-Fund Carry = €5m

versus:

Separate Investment A Carry = €10m

Same investments.

Same proceeds.

Same 20% carry.

Different economic population.

Therefore:

Correct Formula + Wrong Economic Population = Wrong Carry

10. Sign Conventions

A calculation should use a consistent sign convention.

For investor return calculations, a common convention is:

Contribution = Negative

Distribution = Positive

Thus:

This is intuitive when calculating investor IRRs.

From the fund perspective, however, the signs could be reversed.

The particular convention matters less than consistency.

10.1 Why signs matter

Correct investor cash flows:

−€100m, +€120m

Suppose the contribution is accidentally stored as positive:

+€100m, +€120m

A spreadsheet can still sum these values.

It can still produce outputs.

But the economic meaning has disappeared.

This illustrates:

Executable ≠ Economically Valid

10.2 Separate presentation from storage

For readability, this chapter will often say:

Investors contribute €100 million.

rather than:

Investor cash flow = −€100 million.

Similarly, allocation tables will generally show positive amounts allocated to recipients.

The underlying calculation convention should nevertheless remain explicit.

11. Calculation State

A waterfall has memory.

Its current result depends not only on the new event but also on what has happened before.

That history can be represented through calculation state.

Relevant state variables might include:

• cumulative contributions;
• unreturned capital;
• cumulative distributions;
• preferred return accrued;
• preferred return paid;
• catch-up completed;
• cumulative carry generated;
• cumulative carry distributed;
• remaining commitment;
• recycled amounts;
• tax advances;
• carry held in escrow; and
• clawback balance.

The exact state variables depend upon the waterfall.

The general principle is:

Previous State + New Economic Event + Waterfall Rules = New State

11.1 State immediately after contribution

Investor contributes €100 million.

State:

11.2 State after €40 million return of capital

The next distribution begins from this new state.

It does not begin from the original €100 million position.

12. State Transition Example

Continue the example.

Opening state:

• unreturned capital = €60m;
• cumulative LP distributions = €40m;
• carry = €0m.

A new €80 million distribution occurs.

Step 1 — Return remaining capital

min(€80m, €60m) = €60m

Remaining distribution:

€20m

Unreturned capital:

€0m

Step 2 — Residual split

Assume 80:20.

LP:

€20m × 80% = €16m

Carry:

€20m × 20% = €4m

New state

Cumulative LP distributions:

€40m + €60m + €16m = €116m

Cumulative carry:

€4m

Total distributed:

€120m

Reconciliation:

€116m + €4m = €120m

The €80 million distribution generated only €4 million carry because €60 million was still required to return capital.

If the €80 million had incorrectly been treated as an isolated event with no history, the result could be very different.

13. Cumulative Versus Period Calculations

Waterfalls are often calculated at repeated dates:

• after a distribution;
• month-end;
• quarter-end;
• year-end;
• reporting date;
• valuation date;
• carry payment date; or
• final liquidation.

This creates an important distinction between:

Cumulative Entitlement

and:

Incremental Movement

Suppose the waterfall produces cumulative carry of:

• €0m at Q1;
• €4m at Q2;
• €7m at Q3;
• €11m at Q4.

The incremental carry movements are:

The fundamental relationship is:

Incremental Carry = Current Cumulative Carry − Previous Cumulative Carry

This principle will later become central to realised carry, unrealised carry, accounting movements and clawback.

14. Why the Current Distribution Should Not Automatically Be Calculated in Isolation

Assume:

• contribution = €100m;
• 20% carry after return of capital;
• distributions occur in three instalments.

Distribution 1

€80m.

Capital returned:

€80m

Remaining unreturned capital:

€20m

Carry:

€0m

Distribution 2

€50m.

First €20m returns remaining capital.

Remaining:

€30m

Carry:

€30m × 20% = €6m

Distribution 3

€40m.

Capital is already fully returned.

Carry:

€40m × 20% = €8m

Total carry:

€14m

Now look at the entire history.

Total distributions:

€80m + €50m + €40m = €170m

Total contributions:

€100m

Profit:

€70m

Carry:

€70m × 20% = €14m

The incremental and cumulative methods reconcile.

14.1 The wrong isolated calculation

Suppose Distribution 2 had been treated independently:

€50m < €100m capital

A model with no historical state might conclude that the entire €50 million is return of capital and therefore produces no carry.

That would be wrong.

The model needs to know that €80 million had already been returned.

Therefore:

New Distribution + No Historical State ≠ Complete Waterfall Calculation

15. Cumulative Recalculation Versus Balance Roll-Forward

There are two broad ways in which a model can maintain waterfall state.

Method 1 — Recalculate from complete history

At every calculation date, rerun the waterfall using all relevant economic events from inception.

Method 2 — Roll forward prior balances

Start with the previous validated state and apply only the new events.

Conceptually:

Opening State + Current Events = Closing State

Both methods can be valid.

They serve somewhat different purposes.

15.1 Full-history recalculation

Suppose there are:

• 500 historical economic events;
• 20 new events.

The full-history method recalculates all 520 events.

Its advantage is that the result is reconstructed from the underlying economic history.

If an old event is corrected, the impact naturally flows through the calculation.

15.2 Balance roll-forward

The roll-forward method begins with validated opening balances such as:

• unreturned capital = €60m;
• preferred return balance = €8m;
• cumulative carry = €4m.

It then processes the new events.

This can be efficient, but the integrity of the opening state becomes critical.

If the opening balance is wrong, the new calculation inherits the error.

15.3 Reconciliation between methods

A strong control environment may use both concepts:

Full-History Recalculation Result = Roll-Forward Result

If they differ, something requires investigation.

This principle becomes especially valuable in complex operational environments.

16. Return of Capital

Return of capital is one of the fundamental balances in a waterfall.

At its simplest:

Unreturned Capital = Relevant Contributions − Capital Returned

The word relevant is important.

The waterfall documentation determines which contributions enter the return-of-capital base.

For now, assume all contributions do.

16.1 Basic example

Contribution:

€100m

Distribution:

€30m

Return of capital:

€30m

Unreturned capital:

€70m

No carry.

16.2 Second distribution

New distribution:

€50m

Opening unreturned capital:

€70m

Return of capital:

€50m

Closing unreturned capital:

€20m

Still no carry.

16.3 Third distribution

New distribution:

€50m

Opening unreturned capital:

€20m

Return of capital:

€20m

Remaining:

€30m

At 20% carry:

Carry = €6m

LP residual:

€24m

The third distribution is therefore allocated:

17. Multiple Contributions

Now introduce several contributions.

Before considering preferred return, the different dates do not necessarily affect a simple whole-fund return-of-capital calculation.

Unreturned capital:

€90m

Suppose the fund distributes €60 million.

Closing unreturned capital:

€90m − €60m = €30m

A subsequent €50 million distribution is allocated:

Return capital:

€30m

Remaining:

€20m

At 20% carry:

GP:

€4m

LP residual:

€16m

Total second distribution:

€30m + €16m + €4m = €50m

Cumulative result:

Total contributions:

€90m

Total distributions:

€110m

Profit:

€20m

Carry:

€4m

The calculation reconciles.

18. Contributions After Distributions Have Begun

Fund cash flows are not always conveniently ordered as:

All Contributions → All Distributions

A fund may distribute proceeds and later call additional capital.

Consider:

1. Contribution: €100m
2. Distribution: €120m
3. New contribution: €30m
4. Distribution: €50m

Assume 20% carry after return of capital and ignore preferred return.

Event 1

Contribution:

€100m

Unreturned capital:

€100m

Event 2

Distribution:

€120m

Return capital:

€100m

Profit:

€20m

Carry:

€4m

LP receives:

€116m

Unreturned capital:

€0m

Cumulative carry:

€4m

Event 3

New contribution:

€30m

Unreturned capital increases:

€0m + €30m = €30m

This is important.

The fact that capital had previously been fully returned does not necessarily mean that the return-of-capital balance can never increase again.

Event 4

Distribution:

€50m

First:

€30m Return of Capital

Remaining:

€20m

Carry on residual:

€4m

Cumulative carry:

€8m

This simple example anticipates a broader principle:

Waterfall State Can Move in More Than One Direction

A balance may be satisfied and later become relevant again because of subsequent economic events.

19. Which Contributions Count?

Now we reach a more substantive issue.

Suppose investors fund:

• €100m for investments;
• €10m for management fees;
• €5m for fund expenses.

Total contributions:

€115m

The waterfall may treat these amounts differently.

Scenario A — All contributions returned before carry

Return-of-capital base:

€115m

Suppose distributions are €150 million.

Profit available after return of capital:

€150m − €115m = €35m

Carry:

€35m × 20% = €7m

Scenario B — Only investment contributions enter the relevant capital tier

Return-of-capital base:

€100m

Profit entering the carry tier:

€150m − €100m = €50m

Carry:

€50m × 20% = €10m

Difference:

€3m

The calculation formula is identical.

Only the definition of relevant contributions changed.

Therefore:

Return of Capital ≠ Automatically Return of All Contributions

The contractual economic perimeter determines the balance.

20. Capital Returned Versus Cash Distributed

Just as not every contribution necessarily enters the same capital base, not every distribution necessarily reduces unreturned capital.

Assume:

• contribution = €100m;
• distribution = €20m;
• distribution is classified as income and, under the assumed waterfall, does not reduce the return-of-capital balance.

Then:

Cash Distributed = €20m

but:

Capital Returned = €0m

Unreturned capital remains:

€100m

If another €100 million is later distributed as return of capital, the investor may have received €120 million in total while the capital balance has only then reached zero.

Thus:

Cumulative Distributions ≠ Necessarily Capital Returned

The economic classification matters.

21. A Four-Event Worked Example

Consider the following simplified history:

Assume:

• all contributions participate;
• all distributions first return capital;
• 20% carry thereafter;
• no hurdle.

After Event 1

Unreturned capital:

€60m

After Event 2

Unreturned capital:

€60m + €40m = €100m

Event 3 — €70m distribution

Return capital:

€70m

Closing unreturned capital:

€30m

Carry:

€0m

Event 4 — €80m distribution

Opening unreturned capital:

€30m

Return capital:

€30m

Remaining:

€50m

Carry:

€50m × 20% = €10m

LP profit allocation:

€40m

Event 4 allocation:

Cumulative LP distributions:

Event 3:

€70m

Event 4:

€70m

Total LP:

€140m

Carry:

€10m

Total:

€150m

Total contributions:

€100m

Total profit:

€50m

LP share of profit:

€40m

GP share:

€10m

Reconciliation:

€100m Capital + €40m LP Profit + €10m Carry = €150m

22. Partial Distributions and Tier Boundaries

Now introduce a second tier without yet introducing time.

Assume:

• capital = €100m;
• fixed preferred amount = €20m;
• 100% GP catch-up of €5m;
• residual split 80:20.

This creates three important thresholds:

€100m — capital completely returned

€120m — preferred amount completely allocated

€125m — catch-up completely allocated

We can now observe what happens as distributions cross each boundary.

Total distribution = €90m

LP:

€90m

Carry:

€0m

Unreturned capital:

€10m

Total distribution = €100m

LP:

€100m

Carry:

€0m

Capital exactly returned.

Total distribution = €110m

LP:

• €100m capital;
• €10m preferred amount.

Total LP:

€110m

Carry:

€0m

Total distribution = €120m

LP:

• €100m capital;
• €20m preferred amount.

Carry:

€0m

Total distribution = €122m

LP:

€120m

GP catch-up:

€2m

Total distribution = €125m

LP:

€120m

GP catch-up:

€5m

Catch-up is now complete.

Total distribution = €150m

After €125m threshold:

Residual:

€25m

LP:

€25m × 80% = €20m

GP:

€25m × 20% = €5m

Totals:

LP:

€120m + €20m = €140m

GP:

€5m catch-up + €5m residual = €10m

23. Marginal Versus Cumulative Economics

The preceding example illustrates an important distinction.

At €122 million total distributions:

• cumulative profit = €22m;
• cumulative carry = €2m.

Effective cumulative carry percentage:

€2m / €22m = 9.09%

Yet the marginal carry percentage between €120m and €122m is:

100%

Both statements are correct.

They measure different things.

23.1 Cumulative effective carry

Cumulative Carry / Cumulative Relevant Profit

At €122m:

€2m / €22m = 9.09%

23.2 Marginal carry

Carry allocated from the next increment of value.

Between €120m and €125m:

100%

Above €125m:

20%

This distinction will become particularly important for super carry.

A fund may have a marginal carry rate of 30% above a particular threshold without the GP immediately receiving 30% of all cumulative profit.

Therefore:

Marginal Carry Rate ≠ Cumulative Effective Carry Rate

24. Calculation Boundaries

Waterfall errors frequently occur at tier boundaries.

A model should therefore be tested:

Immediately Below the Boundary

Exactly at the Boundary

Immediately Above the Boundary

Consider the €100 million return-of-capital threshold.

€99.999999m distribution

Unreturned capital:

€0.000001m

Carry:

€0

€100.000000m distribution

Unreturned capital:

€0

Carry:

€0

€100.000001m distribution

Capital:

€100m

Excess:

€0.000001m

At 20% carry:

€0.0000002m

The calculation should move smoothly across the boundary.

It should not suddenly allocate an additional material amount merely because a threshold has been crossed.

25. Discontinuities Versus Changes in Marginal Allocation

A waterfall can change its marginal allocation percentage at a boundary without producing an economic discontinuity.

In the earlier example:

• before €120m, GP marginal allocation = 0%;
• between €120m and €125m, GP marginal allocation = 100%;
• above €125m, GP marginal allocation = 20%.

The slope of the carry function changes.

The cumulative carry itself should remain continuous.

At exactly €125m:

Carry = €5m

At €125.000001m:

Carry = €5m + 20% × €0.000001m

There should not be an unexplained jump from, for example, €5 million to €10 million.

This distinction will be useful later:

Tier Transition Can Change Marginal Economics Without Creating a Discontinuous Entitlement

26. The Waterfall as a Piecewise Function

The basic waterfall can now be represented mathematically.

Assume:

• capital = €100m;
• preferred amount = €20m;
• full catch-up = €5m;
• residual carry = 20%.

Let:

D = Cumulative Distributions

and:

C(D) = Cumulative Carry

Then:

If D ≤ €120m

C(D) = €0

If €120m < D ≤ €125m

C(D) = D − €120m

If D > €125m

C(D) = €5m + 20% × (D − €125m)

Test at €123m:

C(123) = €123m − €120m = €3m

Test at €150m:

C(150) = €5m + 20% × €25m

= €10m

Test at €200m:

C(200) = €5m + 20% × €75m

= €20m

The waterfall is therefore not one percentage calculation.

It is a series of allocation functions.

Waterfall Economics = Series of Piecewise Allocation Functions

27. Calculation Order Matters

Now consider what happens if the correct rules are applied in the wrong order.

Assume:

• €100m capital;
• €20m preferred amount;
• €150m distribution;
• full catch-up;
• 20% residual carry.

Correct result:

Carry = €10m

Suppose instead someone calculates 20% of all profit first:

Profit:

€50m

Carry:

€10m

Coincidentally, the result is the same.

This is dangerous because the incorrect method appears to work.

27.1 Change the distribution

Now total distribution is €122 million.

Correct waterfall:

• €100m capital;
• €20m preferred;
• €2m catch-up.

Carry:

€2m

Incorrect shortcut:

Profit:

€22m

20%:

€4.4m

Now the error becomes visible.

Therefore, testing only high-performance scenarios may fail to reveal an incorrect waterfall implementation.

The model should be tested across different economic states.

28. A Formula Can Be Right Only in Part of the Waterfall

The previous example reveals another important modelling issue.

Above completion of the full catch-up, cumulative carry may indeed equal 20% of cumulative profit.

At €150m:

Profit:

€50m

Carry:

€10m

At €200m:

Profit:

€100m

Carry:

€20m

But at €122m:

Profit:

€22m

Carry:

€2m, not €4.4m.

Thus:

Carry = 20% × Profit

is not universally wrong.

It is conditionally correct only after the waterfall has reached the appropriate state.

This is why formulas cannot be separated from their applicability conditions.

A complete calculation rule is not merely:

Formula

It is:

Condition + Formula

29. Waterfall State Determines the Applicable Rule

We can describe the example as four states.

State 1 — Capital not fully returned

Applicable marginal allocation:

100% LP

State 2 — Capital returned, preferred amount incomplete

Applicable marginal allocation:

100% LP

The recipient is still the LP, but the economic classification has changed from capital to preferred return.

State 3 — Catch-up

Applicable marginal allocation:

100% GP

State 4 — Residual tier

Applicable marginal allocation:

80% LP / 20% GP

The amount of cumulative distribution determines the state in this simplified example.

In more complex waterfalls, the state can depend on:

• IRR;
• MOIC;
• investment realisation status;
• write-offs;
• investor;
• vehicle;
• economic stream;
• elapsed time;
• remaining commitment;
• cumulative distributions; and
• combinations of several conditions.

The general principle remains:

Current Economic State → Applicable Waterfall Rule

30. Incremental Carry from Cumulative Entitlement

Suppose the fund is valued or calculated at four dates.

Cumulative carry is:

Incremental carry:

Therefore:

Incremental Carryₜ = Cumulative Carryₜ − Cumulative Carryₜ₋₁

This method becomes particularly important when the cumulative entitlement can also decrease.

30.1 Negative incremental carry

Suppose:

Q3 movement:

€11m − €14m = −€3m

The incremental carry is negative €3 million.

This does not mean the waterfall allocated negative cash.

It means the cumulative economic entitlement decreased by €3 million.

Depending on the context, that reduction might affect:

• accrued carry;
• accounting recognition;
• escrow;
• future distributions;
• interim true-up; or
• clawback.

This distinction will become central later in the chapter.

31. Carry Generated Versus Carry Paid

Another distinction should be introduced early.

Suppose the waterfall calculates cumulative carry of €10 million.

That does not necessarily mean €10 million has been paid to carry recipients.

For example:

Carry Generated = €10m

Of this:

• €6m is distributed;
• €4m is retained or escrowed.

Then:

Carry Generated = €10m

Carry Distributed = €6m

Carry Retained = €4m

These are different balances.

If the fund subsequently deteriorates and economic carry falls to €7 million:

Economic Carry Entitlement = €7m

The €6 million already paid may still be covered.

The €4 million retained amount, however, no longer represents fully distributable carry.

A simplistic model containing only one field called "carry" would struggle to represent this correctly.

Therefore:

Carry Generated ≠ Carry Distributed ≠ Carry Retained ≠ Final Carry Entitlement

32. The Importance of Classification

Consider the following €10 million payment to the GP.

There are several possibilities:

Scenario A — Carry distribution

The payment reduces carry payable.

Scenario B — Tax advance

The payment may represent an advance against future carry distributions.

Scenario C — Return on GP commitment

The payment relates to the GP's position as an investor.

Scenario D — Management fee

The payment is compensation outside the waterfall.

All four involve:

€10m Cash Paid to GP

Yet they should not be treated identically.

Therefore:

Cash Recipient + Amount ≠ Economic Classification

The model must understand what the payment represents.

This is one reason why merely extracting cash transactions from a fund accounting system is not necessarily sufficient to calculate carry.

Providing the Cash Flows ≠ Calculating the Carry

The waterfall requires an economic interpretation of those cash flows.

33. Data Granularity Follows Economic Granularity

Suppose a fund has ten investments.

If the waterfall is purely whole-fund and no provision requires investment-level distinctions, aggregate fund-level cash flows may be sufficient for certain calculations.

Now suppose the waterfall becomes deal-by-deal.

The calculation needs to know which cash flow belongs to which investment.

The same aggregate data is no longer sufficient.

Similarly, if one investor is excused from Investment 7, the model may need investor-by-investment data.

Therefore:

More Granular Economic Rules → More Granular Data Requirement

This principle has major implications for system architecture.

It is impossible to reconstruct a distinction that was never captured.

If all investment proceeds have historically been stored only as one aggregated fund-level amount, a future calculation cannot reliably determine investment-specific economics without another source.

34. Aggregation Is Not Automatically Harmless

Consider two investors.

Investor A contributes €60 million.

Investor B contributes €40 million.

They participate proportionally in every transaction.

If all economic terms are identical, it may be possible to calculate the fund-level waterfall and allocate the result 60:40.

Suppose total profit is €50 million and carry is 20%.

Fund carry:

€10m

Investor A economic share:

€6m

Investor B economic share:

€4m

Separate calculations produce the same result.

But now suppose Investor B is excluded from an investment that generates most of the profit.

The 60:40 relationship no longer describes the relevant economic history.

Aggregating first and allocating later may produce the wrong result.

This issue will be developed extensively in Part IV.

For now, the foundational rule is:

Ability to Aggregate Data ≠ Economic Validity of Aggregation

35. Scale Versus Economics

Suppose Investor A participates with €10 million and Investor B with €20 million in exactly the same proportional cash-flow pattern.

Investor A:

• contributes €10m;
• receives €15m.

Investor B:

• contributes €20m;
• receives €30m.

Investor B's cash flows are exactly twice Investor A's.

If all waterfall terms are identical and purely proportional, the economics may simply scale.

At 20% carry after capital:

Investor A:

Profit:

€5m

Carry:

€1m

Investor B:

Profit:

€10m

Carry:

€2m

Therefore:

Different Scale ≠ Necessarily Different Economics

Now change Investor B's timing or participation.

The relationship may disappear.

Thus:

Different Cash-Flow Pattern → Potentially Different Waterfall Position

This distinction will later allow us to test whether investor-level calculations can validly be aggregated.

36. Calculation Level and Reporting Level Are Different Questions

A waterfall may need to be calculated at one level and reported at another.

For example:

• calculate separately by investor;
• aggregate results for fund reporting.

Or:

• aggregate parallel vehicles for the waterfall;
• disaggregate the resulting carry back to vehicles.

Therefore:

Calculation Level ≠ Necessarily Reporting Level

This is particularly important for technology design.

A system should not assume that the entity displayed in a report is necessarily the entity at which the economics were calculated.

37. Rounding

Even simple waterfall calculations require a rounding policy.

Suppose €10 million is divided among three participants:

• A: 33.3333%;
• B: 33.3333%;
• C: 33.3334%.

At high precision:

A:

€3,333,330

B:

€3,333,330

C:

€3,333,340

Total:

€10,000,000

But if percentages or amounts are rounded prematurely, small differences can emerge.

With hundreds of participants, thousands of cash flows and repeated calculations, those differences can accumulate.

The general rule should be:

Calculate at Sufficient Precision → Round at the Appropriate Output Point

rather than:

Round Every Intermediate Step

The precise rounding policy should itself form part of the calculation specification.

38. Why Small Rounding Differences Can Become Economic Differences

Assume 100 participants each have an allocation that mathematically equals:

€100,000.005

If each participant is independently rounded to cents:

€100,000.01

Total rounded allocation:

€10,000,001.00

But the unrounded aggregate is:

€10,000,000.50

Difference:

€0.50

The amount is immaterial in this example.

But the conceptual issue is important.

Should the calculation:

1. calculate aggregate entitlement and then allocate it?
2. calculate each participant independently and sum the rounded results?
3. allocate residual rounding differences according to a defined rule?

These are calculation design questions.

In a large carry plan, they should not be left to accident.

39. Reconciliation

Every waterfall should contain reconciliation controls.

The most basic is:

Total Value Available = Total Value Allocated + Unallocated Value

If all value has been distributed:

Total Value Available = LP Allocation + Carry Allocation

Example

Distribution:

€180m

LP:

€164m

Carry:

€16m

Check:

€180m − €164m − €16m = €0

39.1 Profit reconciliation

Contribution:

€100m

Distribution:

€180m

Profit:

€80m

LP receives:

• capital = €100m;
• profit = €64m.

GP receives:

• carry = €16m.

Profit check:

€64m + €16m = €80m

39.2 Tier reconciliation

For each tier:

Opening Available Value − Tier Allocation = Closing Available Value

Example:

Each tier independently reconciles.

40. Balance Reconciliation

State variables should also reconcile.

For unreturned capital:

Opening Unreturned Capital + New Relevant Contributions − Capital Returned = Closing Unreturned Capital

Example:

Opening unreturned capital:

€30m

New contribution:

€20m

Capital returned:

€40m

Closing:

€30m + €20m − €40m = €10m

A model reporting €15 million would fail the balance reconciliation even if its final carry happened to appear reasonable.

This type of control becomes increasingly important as the number of state variables grows.

41. Cumulative-to-Incremental Reconciliation

Cumulative carry should reconcile to its movements.

Suppose:

Opening cumulative carry:

€8m

Current-period increase:

€3m

Current cumulative carry:

€11m

Check:

€8m + €3m = €11m

If current-period carry consists of several components:

• new realised carry = €2m;
• unrealised movement = €1.5m;
• adjustment = −€0.5m;

then:

€2m + €1.5m − €0.5m = €3m

and:

€8m + €3m = €11m

Later chapters will develop these reconciliations much further.

42. Reconciliation Does Not Replace Independent Validation

Suppose a €100 million distribution is incorrectly allocated:

• LP = €70m;
• GP = €30m.

The calculation reconciles:

€70m + €30m = €100m

But if the waterfall required 80:20, the allocation is wrong.

Therefore there are at least two different categories of control:

Arithmetic controls

Does the calculation add up?

Economic controls

Was the correct rule applied?

A robust waterfall needs both.

Arithmetic Reconciliation + Economic Validation

Neither replaces the other.

43. Scenario Testing

A waterfall should not be tested with only one example.

A single scenario may accidentally produce the correct result even when the implementation is wrong.

The earlier full-catch-up example demonstrated this.

At sufficiently high performance:

20% × Total Profit

can accidentally equal the correct carry.

At lower performance, the shortcut fails.

Therefore the model should be tested across a range of economic states.

For a basic waterfall, useful scenarios include:

1. total loss;
2. partial return of capital;
3. exact return of capital;
4. just above return of capital;
5. below hurdle;
6. exactly at hurdle;
7. inside catch-up;
8. exactly at completion of catch-up;
9. just above catch-up;
10. strong performance deep inside the residual tier.

This testing approach will be used throughout Chapter 4.

44. Boundary Testing

Scenario testing asks whether the model behaves correctly in different economic circumstances.

Boundary testing focuses specifically on transitions.

For every material threshold:

Test Below → Test At → Test Above

Suppose a tier begins at €120 million.

Test:

€119,999,999.99

€120,000,000.00

€120,000,000.01

The expected change should be understood before the model is run.

This is particularly important for:

• preferred-return thresholds;
• catch-up completion;
• MOIC hurdles;
• super-carry thresholds;
• investment write-off tests;
• remaining-commitment conditions;
• vesting thresholds; and
• clawback caps.

45. Testing Economic Invariants

Some relationships should remain true regardless of the scenario.

These can be treated as economic invariants.

Examples include:

Total Allocations Cannot Exceed Available Value

Unreturned Capital Cannot Become Negative Unless the Contract Explicitly Creates a Different Balance

Carry Cannot Be Allocated to a Tier Before the Conditions for Entering That Tier Have Been Satisfied

LP Allocation + GP Allocation + Unallocated Value = Total Available Value

These rules can be used as controls.

45.1 Example

Suppose:

Available distribution:

€50m

Model allocations:

• LP = €42m;
• GP = €10m.

Total:

€52m

The model has created €2 million of value.

It fails immediately:

€50m ≠ €42m + €10m

A sophisticated formula is irrelevant if the most basic invariant fails.

46. Reproducibility

A defensible waterfall should be reproducible.

If two competent people are given:

• the same governing economic interpretation;
• the same calculation specification;
• the same data;
• the same calculation date; and
• the same conventions,

they should obtain the same result.

Therefore:

Same Rules + Same Data + Same Calculation State = Same Result

If they do not, at least one element has not been specified sufficiently.

Possible causes include:

• different economic dates;
• different rounding;
• different day counts;
• different treatment of fees;
• different event classifications;
• different compounding conventions;
• different investor populations;
• different treatment of remaining commitment; or
• different interpretation of a waterfall tier.

This is why the calculation specification matters.

47. Deterministic Does Not Mean Correct

A system may always produce exactly the same answer from the same input.

That makes the system deterministic.

It does not prove that the answer is economically correct.

Suppose a system is configured to calculate carry as:

20% × All Distributions

It will reproduce its answer perfectly.

For:

€160m distribution

it will always calculate:

€32m

The calculation is deterministic.

Under our simple return-of-capital-first waterfall, it is also wrong.

Therefore:

Deterministic ≠ Correct

The stronger standard is:

Correct Interpretation + Controlled Data + Correct Configuration + Deterministic Execution

48. Traceability

A calculated carry number should be traceable backwards.

Suppose the model reports:

Carry = €16m

The user should be able to understand:

1. which waterfall produced the €16m;
2. which tiers were reached;
3. which economic events entered the calculation;
4. which balances were used;
5. which contractual economic rules governed those balances; and
6. which source data supported the events.

Conceptually:

Carry Result → Waterfall Tiers → Calculation State → Economic Events → Source Data → Governing Economics

A result that cannot be explained is difficult to review and difficult to defend.

This principle becomes increasingly important as calculations become automated.

49. A Complete Foundational Worked Example

We can now combine the concepts introduced in Part I.

Assume the following economic rules:

• all relevant contributions must first be returned;
• after return of capital, a fixed €20 million preferred amount is allocated to the LP;
• the GP then receives a 100% catch-up until it has received €5 million;
• all subsequent value is allocated 80% to the LP and 20% to carry.

For now, the €20 million preferred amount is simply given. Part II will calculate it from actual dated cash flows.

The economic events are:

Total contributions:

€100m

Total distributions:

€180m

Event 1 — €60m contribution

Unreturned capital:

€60m

Carry:

€0m

Event 2 — €40m contribution

Unreturned capital:

€100m

Carry:

€0m

Event 3 — €50m distribution

Opening unreturned capital:

€100m

Return capital:

€50m

Closing unreturned capital:

€50m

Carry:

€0m

Event 4 — €40m distribution

Opening unreturned capital:

€50m

Return capital:

€40m

Closing unreturned capital:

€10m

Carry:

€0m

Cumulative distributions:

€90m

Event 5 — €30m distribution

Opening unreturned capital:

€10m

Capital tier

Return capital:

€10m

Remaining distribution:

€20m

Unreturned capital:

€0m

Preferred tier

Preferred amount required:

€20m

Available:

€20m

LP receives:

€20m

Remaining:

€0m

Preferred amount is fully satisfied.

Carry remains:

€0m

Cumulative distributions:

€120m

The waterfall has reached exactly the end of the preferred tier.

Event 6 — €60m distribution

Opening state:

• unreturned capital = €0m;
• preferred amount remaining = €0m;
• catch-up remaining = €5m;
• cumulative carry = €0m.

Catch-up tier

Available:

€60m

Catch-up required:

€5m

GP receives:

€5m

Remaining:

€55m

Residual tier

LP:

€55m × 80% = €44m

GP:

€55m × 20% = €11m

Total Event 6 GP allocation:

€5m + €11m = €16m

Total Event 6 LP allocation:

€44m

Cumulative result

Total LP distributions:

Events 3 and 4:

€50m + €40m = €90m

Event 5:

€30m

Event 6:

€44m

Total LP:

€164m

Total GP:

€16m

Total:

€180m

Capital reconciliation

Total contributions:

€100m

Capital returned:

€100m

Closing unreturned capital:

€0m

Profit reconciliation

Total profit:

€180m − €100m = €80m

LP profit:

€164m − €100m = €64m

GP profit:

€16m

Check:

€64m + €16m = €80m

Carry percentage

€16m / €80m = 20%

The waterfall has reached its residual state and the GP has fully caught up.

50. The Same Final Economics Through Different Distribution Paths

Now consider whether the timing of distributions matters in the simplified Part I waterfall.

Ignore preferred-return accrual and assume the same fixed €20 million preferred amount.

Scenario A

One distribution:

€180m

Result:

• LP = €164m;
• GP = €16m.

Scenario B

Three distributions:

• €80m;
• €40m;
• €60m.

Total:

€180m

Running the cumulative waterfall produces the same final result:

• LP = €164m;
• GP = €16m.

Scenario C

Six distributions:

• €20m;
• €30m;
• €10m;
• €40m;
• €25m;
• €55m.

Again:

Total = €180m

Under the simplified assumptions, the final cumulative result remains:

• LP = €164m;
• GP = €16m.

At this stage, distribution timing does not change the final result because we have deliberately excluded time-dependent economics.

That is about to change.

Once preferred return is calculated from actual dates:

Same Total Contributions + Same Total Distributions ≠ Necessarily Same Carry

because the timing of those cash flows can change the hurdle.

This is the bridge from Part I to Part II.

51. What Part I Has Established

The calculations in Part I are intentionally simpler than the waterfalls encountered in practice.

Their purpose is to establish the mechanics that remain valid when additional complexity is introduced.

A waterfall is not merely a carry percentage.

It is an ordered allocation process.

Economic Rule → Calculation Rule → Required Data → Calculation

Every tier receives value, allocates value and passes any remainder forward.

Value Entering Tier − Value Consumed = Value Passed Forward

The current calculation depends upon economic history.

Previous State + New Economic Event + Waterfall Rules = New State

Cumulative entitlement and incremental movement are different concepts.

Incremental Carry = Current Cumulative Carry − Previous Cumulative Carry

Economic classification matters.

Cash Movement ≠ Economic Classification

The calculation must operate over the correct population.

Correct Formula + Wrong Economic Population = Wrong Carry

The order of calculation matters.

Correct Inputs + Correct Rules + Wrong Sequence = Wrong Result

A calculation that reconciles is not necessarily economically correct.

Reconciliation Is Necessary but Not Sufficient

A deterministic calculation is not necessarily correct.

Deterministic ≠ Correct

And a defensible calculation ultimately requires traceability from the result back to the underlying economics:

Carry Result → Waterfall Tiers → Calculation State → Economic Events → Source Data → Governing Economics

These principles form the foundation for everything that follows.

Part II introduces the dimension deliberately excluded from most of Part I:

time.

Once contributions and distributions occur on different dates, a preferred return can no longer be represented merely as a fixed amount. The calculation must determine how return accrues between individual economic events, when accrued return becomes part of the compounding base, how partial distributions affect that base, and whether the contractual hurdle is based upon accrued preferred return, IRR, MOIC or a combination of performance measures.

In particular, Part II distinguishes two fundamentally different approaches to compound preferred return:

Individual Cash-Flow Accrual + Individual Anniversary Compounding

and:

Individual Cash-Flow Accrual + Common-Date Compounding

The distinction is critical:

Each Cash Flow Has Its Own Economic Date

but:

Each Cash Flow Having Its Own Economic Date ≠ Each Cash Flow Having Its Own Compounding Date

From that foundation, Part II develops preferred return, IRR hurdles, catch-up, MOIC hurdles, multiple performance tiers and super carry.

Need assistance with your Carried Interest Challenges? Reach out to us:

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References and Further Reading

Carried Interest and Waterfall Mechanics

• Stefanova, Mariya (ed.). The Definitive Guide to Carried Interest. Private Equity International, 2017. ISBN 978-1-911316-08-4. In particular: Chapter 7, “The Waterfall Calculation: From the Lawyer’s Drawing Board to the Back Office Desk”; Chapter 8, “Best Practices for Modelling Carried Interest”; and Chapter 9, “Scoring GP Waterfall Models.” Private Equity International — The Definitive Guide to Carried Interest
• Draisma, Gert-Tom. “Using Technology to Calculate and Recognise Carried Interest on the GP Side.” In Mariya Stefanova (ed.), The Definitive Guide to Carried Interest. Private Equity International, 2017, Chapter 11. Private Equity International — The Definitive Guide to Carried Interest

Waterfall Structure, Carried Interest and Alignment

• Institutional Limited Partners Association (ILPA). ILPA Principles 3.0: Fostering Transparency, Governance and Alignment of Interests for General and Limited Partners. 2019. See in particular the guidance concerning GP and fund economics, carried interest, waterfall structures, fees and expenses, alignment of interests, disclosure and clawback. ILPA Principles 3.0
• Institutional Limited Partners Association (ILPA). Private Equity Principles. Earlier ILPA guidance on preferred private equity terms, including waterfall structure, return of contributions, preferred return, calculation of carried interest, escrow and clawback. ILPA Private Equity Principles

Fund Documentation and Distribution Mechanics

• Invest Europe. Professional Standards Handbook. Guidance on fund formation, fund economics, carried interest arrangements, distributions, governance and the relationship between GPs and LPs. Invest Europe Professional Standards Handbook
• Invest Europe. Professional Standards Handbook — Terms in the Fund Documents. See in particular the guidance concerning carried interest rates and bases of calculation, catch-up, escrow, clawback, true-up provisions, drawdowns and distributions. Invest Europe — Terms in the Fund Documents
• Invest Europe. Professional Standards Handbook — Managing Your Relationship with LPs. See in particular the guidance concerning distributions, classification of distributions, recallability, carried-interest calculations, distributions in specie, taxation, reinvestment and LP and GP clawback provisions. Invest Europe — Relationships with LPs

Reporting, Reconciliation and Control

• Institutional Limited Partners Association (ILPA). ILPA Principles 3.0. See particularly the principles concerning regular and consistent disclosure of fees, expenses and carried-interest calculations and their periodic review. ILPA Principles
• Invest Europe. Investor Reporting Guidelines — Fund Information. See particularly the guidance concerning disclosure of realised and unrealised carried interest, distributed carry, escrowed carry and potential clawback. Invest Europe Investor Reporting Guidelines — Fund Information

Related Reading

• Invest Europe. Professional Standards Handbook — Forming and Raising a Fund. Guidance concerning fund economics, carried-interest structures, timing of carry payments, clawback mechanisms, subsequent closings and equalisation. Invest Europe — Forming and Raising a Fund
• Invest Europe. Professional Standards Handbook — Extending and Winding Up a Fund. Guidance concerning carried-interest escrow, clawback and liabilities during the final stages and liquidation of a fund. Invest Europe — Extending and Winding Up a Fund

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