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

First published: 24th of September 2026

Latest update: 2nd of October 2026

Status: First Draft

Part II established how preferred returns, hurdles, catch-up provisions and performance tiers are calculated.

Those calculations answered questions such as:

• How much preferred return has accrued?
• When does accrued preferred return compound?
• Has an IRR hurdle been achieved?
• Has a MOIC threshold been crossed?
• How much value must pass through a catch-up tier?
• When does a higher carry percentage become applicable?

Those calculations can all be mathematically correct and still produce the wrong carried interest.

The reason is simple.

Before applying the waterfall, we must determine what goes into it.

Consider a fund containing four investments:

At fund level:

Total Profit = €150m − €100m = €50m

At a simple 20% carry rate:

Carry = €10m

But that is only one possible economic result.

If carry is determined separately for each realised investment, Investment A may generate carry before the losses on Investments B and C are recognised.

If written-off investments are included in the relevant return-of-capital calculation, the result changes.

If management fees and fund expenses must also be returned before carry is generated, it changes again.

If Investments A and B belong to one carry pocket and C and D to another, the result can change again.

If income and capital gains are subject to different waterfall streams, another result may emerge.

The arithmetic may be flawless in every case.

What changes is the economic perimeter over which the arithmetic operates.

Therefore:

Correct Mathematics + Wrong Economic Perimeter = Wrong Carry

Part III develops this economic perimeter.

It moves progressively from whole-fund and deal-by-deal waterfalls to hybrid structures, gross and net economics, write-offs and write-downs, fees and expenses, multiple carry pockets, split-stream waterfalls, recycling, recallable distributions and distributions in kind.

The central question throughout this Part is:

Which economic events belong together for the purpose of the waterfall?

That question must be answered before the waterfall can be calculated.

Section A — The Economic Perimeter

1. What Is the Economic Perimeter?

A legal fund may contain:

• many investments;
• many investors;
• multiple vehicles;
• multiple closings;
• different classes;
• different economic streams;
• different carry arrangements.

The legal boundary of the fund does not necessarily determine the economic boundary of every carry calculation.

The relevant waterfall might operate:

• across the entire fund;
• separately by investment;
• across groups of investments;
• separately by economic stream;
• separately by carry pocket;
• across several legally distinct vehicles.

Therefore:

Legal Perimeter ≠ Necessarily Economic Perimeter

The economic perimeter determines which events interact with one another in the waterfall.

2. Why the Perimeter Matters

Suppose:

Investment A

Cost:

€50m

Proceeds:

€100m

Profit:

€50m

Investment B

Cost:

€50m

Proceeds:

€25m

Loss:

€25m

At fund level:

Net Profit = €25m

At 20% carry:

€5m

But if Investment A is calculated independently:

€50m Profit × 20% = €10m Carry

The difference is:

€5m

Nothing about the underlying investments changed.

Only the economic perimeter changed.

3. Cross-Collateralisation

The fundamental distinction can be expressed as a question:

Must losses on one investment be absorbed before profits on another investment generate carry?

If yes, the economics are cross-collateralised to that extent.

If no, profitable investments can potentially generate carry independently.

Consider:

With full cross-collateralisation:

Carry Base = €25m

Without cross-collateralisation:

Investment A may produce:

Carry Base = €50m

while Investment B produces no negative carry at that point.

This distinction lies at the heart of whole-fund versus deal-by-deal economics.

Section B — Whole-Fund Waterfalls

4. Whole-Fund Economics

Under a whole-fund waterfall, carry is generally determined by reference to the cumulative economics of the relevant fund-level population.

Profits and losses across investments interact.

A simplified structure might require:

1. return relevant contributed capital;
2. satisfy preferred return;
3. allocate catch-up;
4. divide residual profit.

Conceptually:

All Relevant Fund Cash Flows → One Cumulative Waterfall

This is often referred to as a European-style waterfall.

The label is useful shorthand, but the underlying contractual mechanics remain more important than the label.

5. Basic Whole-Fund Example

Assume:

Ignore preferred return initially.

Assume:

• all investments have been fully realised;
• 20% carry;
• all investment capital must be returned before carry.

Total proceeds:

€150m

Return capital:

€100m

Profit:

€50m

Carry:

€50m × 20% = €10m

LP:

€140m

GP:

€10m

The losses on B and C reduce the profit generated by A and D before carry is calculated.

6. Investment-Level View of the Same Fund

The individual investment economics are:

A

Profit:

€60m − €20m = €40m

B

Loss:

€20m − €30m = (€10m)

C

Loss:

€0m − €25m = (€25m)

D

Profit:

€70m − €25m = €45m

Gross positive profits:

€40m + €45m = €85m

Losses:

€10m + €25m = €35m

Net profit:

€85m − €35m = €50m

The whole-fund waterfall calculates carry on:

€50m

not:

€85m

Therefore:

Profitable Investments − Loss-Making Investments = Whole-Fund Carry Base

in this simplified example.

7. Whole-Fund Waterfall with Preferred Return

Now add:

• 8% preferred return;
• assume, for simplicity, the resulting preferred-return requirement is €20m;
• 100% catch-up;
• 20% carry.

Total available:

€150m

Return capital

LP:

€100m

Remaining:

€50m

Preferred return

LP:

€20m

Remaining:

€30m

Catch-up

As established in Part II, full catch-up on €20 million at 20% requires:

€5m

GP:

€5m

Remaining:

€25m

Residual split

GP:

€5m

LP:

€20m

Total GP:

€10m

Total LP:

€140m

Again:

GP Carry = €10m

The soft hurdle changes the timing and sequence of allocation, but after full catch-up the GP reaches 20% of the relevant €50 million profit.

Section C — Deal-by-Deal Waterfalls

8. Deal-by-Deal Economics

Under a deal-by-deal structure, individual investments or defined groups of investments can generate carry before the entire fund has completed its economic cycle.

Conceptually:

Investment A → Waterfall A

Investment B → Waterfall B

Investment C → Waterfall C

rather than:

A + B + C → One Fund Waterfall

This can accelerate carry significantly.

It also increases the possibility that carry distributed earlier will exceed the amount ultimately justified by final fund performance.

That is one reason clawback becomes particularly important.

9. The Four-Investment Portfolio under Deal-by-Deal Economics

Return to:

Assume:

• each investment is independently tested;
• capital for the relevant investment is returned first;
• no preferred return;
• 20% carry.

Investment A

Profit:

€40m

Carry:

€8m

Investment B

Loss.

Carry:

€0m

Investment C

Loss.

Carry:

€0m

Investment D

Profit:

€45m

Carry:

€9m

Total carry generated:

€17m

Compare whole-fund carry:

€10m

Difference:

€7m

This difference arises because the €35 million losses on B and C do not reduce the carry generated on A and D under this simplified deal-by-deal structure.

10. The Difference Is Not the Carry Percentage

Both structures use:

20% Carry

Yet:

Whole-fund:

€10m

Deal-by-deal:

€17m

Therefore:

Same Headline Carry Percentage ≠ Same Carry Economics

The economic perimeter is as important as the percentage.

11. Timing Makes the Difference More Important

Assume Investment A is realised first.

Cost:

€20m

Proceeds:

€60m

Under the simplified deal-by-deal waterfall:

Carry:

€8m

may become distributable.

At that time:

• B may still be valued at cost;
• C may still be valued at cost;
• D may still be unrealised.

Several years later:

• B loses €10m;
• C loses €25m.

The €8 million carry on A may already have been paid.

The waterfall has therefore transformed future uncertainty into current carry.

This creates the possibility of:

Interim Carry > Final Carry Entitlement

which creates potential clawback.

Section D — Whole-Fund Versus Deal-by-Deal Timing

12. A Sequential Portfolio

Consider:

Ignore preferred return.

Final economics

Contributions:

€75m

Proceeds:

€80m

Final profit:

€5m

At 20%:

Final whole-fund carry = €1m

But at Year 3, A alone generated:

€40m profit

A pure deal-by-deal calculation could therefore generate:

€8m carry

The final fund economics support only:

€1m

Potential excess:

€7m

This is the economic origin of the clawback problem.

13. Carry Timing Versus Carry Endgame

Two waterfalls can ultimately produce the same carry if all investments perform positively.

But the timing of carry can still differ materially.

Suppose:

• all capital is ultimately returned;
• total profit = €100m;
• final carry = €20m.

A whole-fund waterfall might distribute most carry late in the fund life.

A deal-by-deal waterfall might distribute much of the same €20 million years earlier.

Therefore:

Same Final Carry ≠ Same Carry Timing

And because money has time value:

Same Final Carry ≠ Necessarily Same Economic Value to GP

Timing is itself economically important.

Section E — Hybrid Waterfalls

14. The World Is Not Binary

Waterfalls do not always fit perfectly into:

• whole-fund; or
• deal-by-deal.

A fund may contain intermediate rules.

For example, carry on a realised investment may be permitted only after:

• capital attributable to realised investments has been returned;
• written-off investments have been recognised;
• materially impaired investments have been taken into account;
• certain expenses have been recovered;
• a NAV-based test has been satisfied.

Such a waterfall has deal-level characteristics but also introduces broader cross-collateralisation.

Therefore:

Pure Deal-by-Deal ← Hybrid Structures → Pure Whole-Fund

The relevant question is not:

What label does the waterfall use?

It is:

Which losses, costs and unresolved exposures must be absorbed before carry can be distributed?

15. A Hybrid Example

Return to the four investments:

Suppose A has been realised.

A pure deal-by-deal calculation might use:

A Profit = €40m

Carry:

€8m

Now suppose the hybrid waterfall requires realised losses and written-off investments to be recognised.

Relevant economics become:

A profit:

+€40m

B loss:

−€10m

C write-off:

−€25m

Net:

€5m

Carry base:

€5m

Carry:

€1m

D remains unrealised and may or may not enter the test depending on the contractual rule.

The result has moved from:

€8m

to:

€1m

without becoming a fully realised whole-fund waterfall.

16. Adding a NAV Test

Suppose D has:

• cost = €25m;
• current NAV = €15m.

Unrealised loss:

€10m

If the hybrid waterfall also recognises unrealised write-downs:

Net relevant performance:

€40m − €10m − €25m − €10m = (€5m)

No carry would currently be payable.

If D instead has NAV:

€70m

Unrealised gain:

€45m

Whether that unrealised gain can support additional carry is a separate question.

The contract might:

• recognise losses but not gains;
• recognise both;
• use NAV only as a protective test;
• exclude unrealised value entirely.

Therefore:

Treatment of Unrealised Losses ≠ Necessarily Treatment of Unrealised Gains

Section F — Write-Offs

17. What Is a Write-Off?

An investment may become worthless before the legal entity holding it has formally ceased to exist.

Economically, the fund may recognise that the investment has no remaining value.

Suppose:

• investment cost = €25m;
• current value = €0.

The economic loss is:

€25m

Whether that €25 million enters the waterfall immediately depends on the waterfall rules.

18. Why Write-Offs Matter

Consider:

Investment A

Cost:

€25m

Proceeds:

€75m

Profit:

€50m

Investment B

Cost:

€25m

Written off:

€0m

Loss:

€25m

If B is ignored:

Carry base:

€50m

At 20%:

€10m Carry

If B is included:

Net profit:

€25m

Carry:

€5m

Difference:

€5m

The classification of B as relevant to the carry calculation therefore materially changes the result.

19. Written Off Does Not Necessarily Mean Legally Disposed

This distinction is important for data design.

An investment can potentially be:

• legally owned;
• economically worthless;
• accounted for at zero;
• relevant to the waterfall as a loss.

Therefore:

Legal Ownership Status ≠ Economic Value ≠ Waterfall Treatment

A carry system relying only on disposal transactions may fail to recognise economically relevant write-offs.

Section G — Write-Downs

20. Partial Impairment

Suppose:

• investment cost = €40m;
• current NAV = €15m.

Unrealised loss:

€25m

If the waterfall requires this write-down to be considered before carry can be distributed, the €25 million can reduce the relevant carry position even though the investment has not been realised.

21. Write-Down Example

Assume:

Realised Investment A

Cost:

€30m

Proceeds:

€90m

Profit:

€60m

Unrealised Investment B

Cost:

€50m

NAV:

€20m

Unrealised loss:

€30m

If only realised investment A is considered:

Carry base:

€60m

Carry:

€12m

If B's write-down must also be recognised:

Net relevant profit:

€30m

Carry:

€6m

Again, the carry percentage has not changed.

The economic perimeter has.

22. Write-Down Reversal

Suppose one year later B recovers.

NAV rises:

€20m → €45m

The previous unrealised loss of €30 million has reduced to:

€5m

If the waterfall uses current NAV in the relevant test, the carry position may increase.

This illustrates another state transition:

Write-Down → Reduced Carry Capacity

followed by:

Value Recovery → Increased Carry Capacity

But an increase in calculated carry does not automatically mean the same amount becomes distributable.

Other waterfall conditions may still apply.

Section H — Gross Versus Net Carry Economics

23. Gross or Net of What?

The terms gross carry and net carry are often used loosely.

A more useful question is:

Gross or net of what?

Potential deductions include:

• management fees;
• fund expenses;
• organisational costs;
• broken-deal expenses;
• financing costs;
• taxes;
• other fund-level costs.

Different answers produce different carry bases.

Therefore:

Gross Versus Net Is an Economic-Perimeter Question

24. Basic Gross Versus Net Example

Assume:

• investment capital = €100m;
• proceeds = €180m;
• management fees = €10m;
• other fund expenses = €5m;
• carry = 20%.

Gross investment-profit approach

Investment profit:

€180m − €100m = €80m

Carry:

€16m

Net approach including fees and expenses

Total relevant cost:

€100m + €10m + €5m = €115m

Net profit:

€180m − €115m = €65m

Carry:

€13m

Difference:

€3m

25. Expanding the Cost Base

Now assume:

Total:

€116m

Proceeds:

€180m

If all amounts must be recovered:

Net Profit = €64m

Carry:

€12.8m

But if financing costs are excluded:

Relevant cost:

€115m

Profit:

€65m

Carry:

€13m

If broken-deal costs are also excluded:

Relevant cost:

€113m

Profit:

€67m

Carry:

€13.4m

Small perimeter differences accumulate.

26. Gross and Net Are Not Universal Categories

A waterfall could be:

• net of management fees but not financing costs;
• net of fund expenses but not organisational expenses;
• gross at investment level but subject to a separate fund-level test;
• based on another specifically defined cost population.

Therefore, rather than storing a simple flag:

Gross / Net

a robust calculation specification should identify the actual economic components.

Named Label < Defined Economic Perimeter

Section I — Management Fees

27. Management Fees as Waterfall Cash Flows

Suppose investors contribute:

• €100m for investments;
• €10m for management fees.

If management-fee contributions must be returned before carry:

Return-of-capital requirement:

€110m

If only investment capital participates:

Return-of-capital requirement:

€100m

With proceeds of €150 million:

Including fees

Profit before carry:

€40m

Excluding fees

Profit before carry:

€50m

At 20%:

Difference in carry:

€2m

28. Fees and Preferred Return

The difference can become larger if fee contributions also earn preferred return.

Suppose:

• €100m investment capital;
• €10m fee contributions;
• both outstanding for one year;
• preferred return = 8%.

If both participate:

Preferred return:

€110m × 8% = €8.8m

If only investment capital participates:

€100m × 8% = €8m

Difference:

€0.8m

The fee treatment can therefore affect both:

• return-of-capital base; and
• preferred-return base.

These are separate questions.

Section J — Management Fee Offsets

29. Gross Fee Versus Fee Ultimately Borne by the Fund

Suppose the contractual management fee is:

€10m

but the manager receives:

€3m

of transaction or monitoring fees that offset management fees.

If the offset is 100%, investors ultimately bear:

€7m

of net management fee rather than €10 million.

Therefore:

Gross Management Fee ≠ Necessarily Management Fee Ultimately Borne by Fund

If the waterfall uses net fees actually borne by investors, the relevant amount may be €7 million.

If it uses gross contractual management fees, it may be €10 million.

Again, the governing economics determine the treatment.

30. Fee Offset Example

Assume:

• investment cost = €100m;
• gross management fee = €10m;
• fee offset = €3m;
• proceeds = €160m;
• 20% carry.

Gross-fee basis

Relevant cost:

€110m

Profit:

€50m

Carry:

€10m

Net-fee basis

Relevant cost:

€107m

Profit:

€53m

Carry:

€10.6m

Difference:

€0.6m

The offset indirectly changes carry by changing the cost borne by investors.

Section K — Management Fee Waivers

31. Fee Waiver Is Not Fee Offset

A fee offset generally reduces management fees because other fee income is credited against them.

A fee waiver is economically different.

A manager may waive an amount otherwise payable as management fee in exchange for another economic arrangement, subject to the governing terms and applicable legal and tax framework.

Therefore:

Fee Waiver ≠ Fee Offset

For waterfall modelling, the important question is not the label.

It is:

What cash flow or economic contribution results, and how does the governing waterfall classify it?

Part III focuses on the waterfall consequences rather than the legal or tax analysis of the waiver arrangement.

Section L — Expenses

32. Expense Classification

A private fund can incur many categories of expense.

For example:

• organisational expenses;
• audit;
• legal;
• administration;
• broken-deal costs;
• financing expenses;
• portfolio-related costs;
• taxes;
• regulatory costs.

The fact that an expense exists in the accounting records does not automatically determine its waterfall treatment.

Some expenses may:

• form part of returnable capital;
• earn preferred return;
• reduce distributable profit;
• be excluded from the waterfall;
• be allocated only to particular investors or investments.

Therefore:

Accounting Expense ≠ Automatically Waterfall Expense

33. Expense Perimeter Example

Assume:

• investments = €100m;
• management fees = €10m;
• fund expenses = €5m;
• financing costs = €2m;
• proceeds = €170m.

Perimeter A

Investments only:

Profit:

€70m

Carry:

€14m

Perimeter B

Investments + management fees:

Profit:

€60m

Carry:

€12m

Perimeter C

Investments + management fees + fund expenses:

Profit:

€55m

Carry:

€11m

Perimeter D

All costs:

Profit:

€53m

Carry:

€10.6m

Same fund.

Same proceeds.

Same 20% carry rate.

Four different carry results.

Section M — Broken-Deal Costs

34. Investments That Never Exist

Suppose a fund spends:

€4m

pursuing an acquisition that is ultimately abandoned.

No portfolio investment is created.

But investors have still incurred €4 million of economic cost.

If the waterfall requires those costs to be recovered before carry:

Broken-Deal Cost → Relevant Fund Cost → Reduced Carry Base

If the waterfall excludes them, they do not reduce the carry base in the same way.

This illustrates why a model built exclusively around completed investments can miss relevant economics.

35. Broken-Deal Cost Example

Assume:

• completed investments cost €100m;
• broken-deal costs €4m;
• proceeds €150m;
• 20% carry.

Ignoring broken-deal costs:

Profit:

€50m

Carry:

€10m

Including them:

Profit:

€46m

Carry:

€9.2m

Difference:

€0.8m

The €4 million never became an investment, but it still reduced investor economics.

Section N — Financing Costs

36. Financing as an Economic Cost

Funds can incur:

• subscription-line interest;
• arrangement fees;
• bridge financing costs;
• other borrowing expenses.

Whether these amounts enter the waterfall depends on the contractual rules.

This is separate from the timing issue considered in Part II.

Part II asked:

Which economic date should be used when a subscription facility delays the LP capital call?

Part III asks:

Are the costs of that financing themselves part of the waterfall economics?

These are different questions.

37. Timing Effect and Cost Effect

A subscription facility can therefore affect carry in at least two distinct ways.

Timing channel

It changes when investor cash is called and potentially the relevant hurdle timing.

Cost channel

Interest and fees may reduce fund economics.

Thus:

Subscription Facility → Cash-Flow Timing Effect

and separately:

Subscription Facility → Financing Cost Effect

A complete waterfall analysis may need to consider both.

Section O — Multiple Carry Pockets

38. One Fund Can Contain More Than One Carry Economy

A legal fund can contain several economically separate carry populations.

For example:

• strategy A and strategy B;
• geography A and geography B;
• different investment teams;
• different asset classes;
• different sleeves;
• another contractually defined grouping.

Each can potentially have its own:

• capital base;
• preferred return;
• catch-up;
• carry percentage;
• performance history.

Therefore:

One Legal Fund ≠ Necessarily One Carry Pool

39. Two-Pocket Example

Assume:

Pocket A

Capital:

€50m

Proceeds:

€100m

Profit:

€50m

Pocket B

Capital:

€50m

Proceeds:

€25m

Loss:

€25m

If aggregated:

Total capital:

€100m

Total proceeds:

€125m

Profit:

€25m

At 20%:

€5m Carry

If segregated:

Pocket A:

€50m × 20% = €10m Carry

Pocket B:

€0 Carry

Total:

€10m

Difference:

€5m

The question is whether the two pockets cross-collateralise.

40. Separate Hurdles by Pocket

Now assume each pocket has an 8% hurdle.

Pocket A may have exceeded its hurdle.

Pocket B may not.

If the pockets are independent, Pocket A can potentially generate carry even while Pocket B remains below hurdle.

If aggregated, B's poor performance can prevent or delay carry on A.

Therefore:

Aggregation Is an Economic Rule, Not Just a Modelling Convenience

41. Pocket Identification Must Precede Calculation

A waterfall engine cannot simply group cash flows by fund identifier if the fund contains several carry pockets.

The data may need an additional dimension:

Carry Pocket

Thus:

Fund → Carry Pocket → Economic Events → Waterfall

rather than:

Fund → Economic Events → Waterfall

This is a recurring theme:

Data Structure Must Preserve Economic Structure

Section P — Split-Stream Waterfalls

42. Different Types of Return Can Follow Different Rules

Some structures distinguish between different economic streams.

For example:

• current income;
• capital gains;
• another defined return category.

Different streams may have:

• different hurdle rates;
• different carry percentages;
• different catch-up provisions;
• different return-of-capital mechanics.

Therefore:

One Fund ≠ One Economic Stream ≠ Necessarily One Waterfall

43. Basic Split-Stream Example

Assume a fund generates:

• interest income = €20m;
• dividend income = €10m;
• capital gains = €50m.

Total economic return:

€80m

Suppose, purely for illustration:

• income stream carries at 10%;
• capital-gain stream carries at 20%.

Income:

€30m

Carry:

€3m

Capital gains:

€50m

Carry:

€10m

Total carry:

€13m

If everything were incorrectly aggregated and subjected to 20%:

€80m × 20% = €16m

Difference:

€3m

Classification determines economics.

44. Classification Comes Before Calculation

For a split-stream waterfall, the sequence is:

Economic Event

↓

Classify into Relevant Stream

↓

Update Stream-Specific State

↓

Apply Stream-Specific Waterfall

↓

Determine Carry

Therefore:

Correct Amount + Wrong Stream = Wrong Carry

This is analogous to the economic-perimeter problem elsewhere in the waterfall.

45. Shared Costs Across Streams

Suppose:

• Stream A income = €30m;
• Stream B gains = €50m;
• shared fund expenses = €8m.

How should the €8 million be allocated?

Possibilities might include:

• entirely to one stream;
• pro rata;
• according to another contractual allocation methodology.

If the streams have different carry percentages, the expense allocation can affect total carry.

Therefore, split-stream calculations may require not only classification of revenue but also allocation of shared costs.

46. Shared-Cost Example

Assume:

• Stream A carry = 10%;
• Stream B carry = 20%;
• shared cost = €8m.

Allocate all cost to A

A net:

€22m

Carry:

€2.2m

B:

€50m

Carry:

€10m

Total:

€12.2m

Allocate all cost to B

A:

€30m

Carry:

€3m

B net:

€42m

Carry:

€8.4m

Total:

€11.4m

Difference:

€0.8m

The cost allocation is therefore economically relevant.

Section Q — Multiple Dimensions Can Interact

47. Carry Pocket Plus Split Stream

Suppose a fund contains:

• Pocket A;
• Pocket B.

And each pocket contains:

• income stream;
• capital-gain stream.

The economic architecture is no longer one-dimensional.

It may resemble:

Fund

→ Pocket A

→ Income Stream

→ Capital-Gain Stream

and:

→ Pocket B

→ Income Stream

→ Capital-Gain Stream

Each combination can potentially maintain its own waterfall state.

48. Why Simple Fund-Level Aggregation Can Fail

A system might see:

Fund 123

and aggregate every cash flow belonging to that legal fund.

But economically, the required calculation may be:

W(Pocket A, Income)

W(Pocket A, Capital Gain)

W(Pocket B, Income)

W(Pocket B, Capital Gain)

This may not equal:

W(All Fund Cash Flows)

Therefore:

Ability to Aggregate Data ≠ Economic Validity of Aggregation

Section R — Recycling

49. What Recycling Changes

Suppose an investor contributes:

€100m

The fund later distributes:

€20m

but the governing terms permit that €20 million to be recycled into another investment.

If it is subsequently reinvested, the original distribution did not necessarily represent a permanent reduction of the investor's economic exposure.

Therefore:

Distribution ≠ Necessarily Permanent Distribution

and:

Cash Movement ≠ Economic Classification

50. Simple Recycling Example

Assume:

1. LP contributes €100m.
2. Fund distributes €20m.
3. €20m is recycled and called again.
4. Fund ultimately distributes €140m.

Observed cash flows:

Contributions:

€120m

Distributions:

€160m

A simplistic calculation might conclude:

Profit = €40m

But the correct waterfall treatment depends on how the governing terms classify:

• the initial €20m distribution;
• the subsequent recall;
• recycled capital;
• returnable capital.

The gross cash movements alone do not answer the question.

51. Recycling and Return of Capital

Suppose the €20 million distribution is designated as recallable and later recycled.

The waterfall may need to determine whether the distribution:

• permanently reduced unreturned capital;
• temporarily reduced it;
• is reversed when recalled;
• is treated under another mechanism.

The calculation therefore needs state information.

A cash-flow ledger showing only:

+€20m Distribution

and later:

−€20m Contribution

may be insufficient.

The events need economic classifications.

52. Recycling and Preferred Return

Recycling can also affect preferred return.

Questions can include:

• Does preferred return stop when the initial distribution occurs?
• Does it restart when capital is recalled?
• Does the recalled amount inherit an earlier economic date?
• Does it receive a new economic date?
• Does the relevant preferred-return balance continue uninterrupted?

The answer depends on the governing terms.

Therefore:

Recycling Treatment → Capital State + Timing State → Potential Carry Consequence

Section S — Recallable Distributions

53. Recallable Does Not Mean Recalled

A distribution can be contractually recallable without ever being recalled.

This creates several distinct concepts:

• cash has left the fund;
• LP has received a distribution;
• the amount may still be subject to recall;
• no recall may yet have occurred.

Therefore:

Distributed ≠ Permanently Non-Recallable

and:

Recallable ≠ Actually Recalled

The waterfall may need to distinguish all three states.

54. Remaining Commitment and Recallable Amounts

Suppose:

• original commitment = €100m;
• contributions = €90m;
• recallable distributions = €15m.

A simplistic remaining commitment calculation might say:

€100m − €90m = €10m

But depending on the governing commitment mechanics, the investor could potentially face:

€10m Uncalled Commitment + €15m Recallable Amount

The economic funding capacity could therefore differ from the simple undrawn commitment.

This will become particularly important in Part V when remaining commitment is incorporated into unrealised carry calculations.

Section T — Distributions in Kind

55. Distribution Does Not Require Cash

A fund can distribute an asset rather than cash.

Examples can include:

• listed shares;
• other securities;
• another transferable asset.

For waterfall purposes, the asset normally needs an attributed economic value.

Therefore:

Economic Distribution ≠ Necessarily Cash Movement

56. Basic Distribution-in-Kind Example

Assume:

• unreturned capital = €20m;
• securities with attributed distribution value = €30m are distributed.

If the waterfall treats the €30 million as a distribution:

First:

€20m

returns capital.

Remaining economic value:

€10m

can enter subsequent tiers.

If carry is 20% with no hurdle:

Carry generated:

€2m

The fact that no €30 million cash payment occurred does not prevent the event from having waterfall consequences.

57. Valuation Matters

Suppose the securities are attributed a distribution value of:

€30m

but are later sold by the LP for:

€25m

or:

€35m

The subsequent sale does not necessarily rewrite the historical waterfall event.

The relevant waterfall may have used the contractual distribution value at the distribution date.

Therefore:

Distribution Value ≠ Subsequent Realisation Value

The governing terms determine the valuation methodology.

58. Economic Date Matters Too

A distribution in kind requires not only a value but also an economic date.

If the distribution satisfies:

• return of capital;
• preferred return;
• a hurdle;

the date can affect future accrual.

Thus the event needs at least:

Asset + Attributed Value + Economic Date + Economic Classification

This is another example of why bank cash movements alone cannot reproduce the waterfall.

Section U — Reinvestment after a Distribution in Kind

59. Separate the Fund Event from the Investor's Later Decision

Suppose the fund distributes listed shares worth €30 million.

The LP keeps those shares for another year.

Their value later rises to €40 million.

For the fund waterfall, the relevant distribution may remain:

€30m

The subsequent €10 million gain belongs to the investor's post-distribution ownership period rather than necessarily to the fund waterfall.

This preserves the boundary between:

Fund Economic Event

and:

Investor's Subsequent Asset Performance

Section V — Combining the Architecture

60. A More Realistic Portfolio

Consider the following fund.

Investments

Other economics

• management fees: €10m;
• fund expenses: €3m;
• broken-deal costs: €2m;
• financing costs: €1m.

Total investment cost:

€100m

Other costs:

€16m

Total relevant cost if everything is included:

€116m

Realised proceeds:

€80m

NAV:

€40m

Total value:

€120m

Net value above all costs:

€4m

But that does not tell us the carry.

We still need the waterfall architecture.

61. Architecture 1 — Pure Deal-by-Deal, Realised Investments Only

Investment A:

Profit:

€40m

Carry:

€8m

Investment B:

Loss.

Carry:

€0m

C:

No proceeds.

Carry:

€0m

D:

Unrealised and ignored for realised carry.

Current carry:

€8m

62. Architecture 2 — Realised Investments Plus Written-Off Investments

A:

+€40m

B:

−€10m

C:

−€25m

Net:

€5m

At 20%:

€1m

Current carry:

€1m

63. Architecture 3 — Include Unrealised Write-Up of D

D:

Cost:

€25m

NAV:

€40m

Unrealised gain:

€15m

Combined investment profit:

€5m + €15m = €20m

At 20%:

€4m

But whether unrealised gains are permitted to support carry is a separate contractual question.

64. Architecture 4 — Net of All Costs

Total value:

€120m

Investment cost:

€100m

Other relevant costs:

€16m

Net economic profit:

€4m

At 20%:

€0.8m

We now have four possible calculated amounts:

• €8m;
• €1m;
• €4m;
• €0.8m.

All can be arithmetically correct.

Only the governing waterfall can tell us which economic perimeter is correct.

This is the central lesson of Part III.

Section W — Wrong Calculations That Look Plausible

65. Wrong: Carry on Every Profitable Investment

Suppose a fund contains:

• profitable investments;
• loss-making investments;
• written-off investments.

Calculating 20% of each positive gain and summing the results may appear reasonable.

It is wrong if the waterfall requires losses to be cross-collateralised.

Therefore:

Sum of Positive Investment Carry ≠ Necessarily Fund Carry

66. Wrong: Calculate Everything at Fund Level

The opposite mistake also occurs.

A modeller aggregates all fund cash flows because they share one fund identifier.

This is wrong if the economics require:

• separate carry pockets;
• separate streams;
• investor-specific treatment;
• deal-by-deal calculations.

Therefore:

Same Legal Fund ≠ Necessarily Same Economic Population

67. Wrong: Ignore Write-Offs Because There Is No Distribution

A written-off investment may produce no cash flow.

But it can still create an economically relevant loss.

Therefore:

No Cash Flow ≠ No Waterfall Event

68. Wrong: Use Accounting NAV Without Understanding Its Waterfall Role

NAV can be relevant to:

• write-down tests;
• total carry;
• unrealised carry;
• protective tests.

But accounting NAV is not automatically the amount that should be inserted into every waterfall calculation.

The contractual role of NAV must be defined.

Therefore:

NAV Exists ≠ NAV Automatically Participates in Current Carry

69. Wrong: Treat Every Expense as Economically Identical

Two €1 million accounting expenses can have different waterfall treatment.

One may:

• form part of returnable capital;
• earn preferred return.

Another may:

• reduce profit but not earn preferred return.

Another may:

• be excluded.

Therefore:

Same Accounting Amount ≠ Same Waterfall Treatment

70. Wrong: Net Fees by Assumption

If gross management fees are €10 million and offsets are €3 million, using €7 million may seem economically intuitive.

But it is correct only if the governing waterfall uses the net amount.

The model should implement the contractual rule, not an intuitive view of fairness.

71. Wrong: Treat Recycling as Two Ordinary Independent Cash Flows

A €20 million distribution followed by a €20 million recall can look like:

+€20m

then:

−€20m

But its waterfall meaning may depend on its recallable/recycled classification.

The same amounts and dates can have different economics depending on classification.

Therefore:

Cash-Flow History ≠ Complete Economic History

72. Wrong: Ignore Non-Cash Events

Write-offs, write-downs and distributions in kind demonstrate that a waterfall can be affected by events that do not appear as conventional bank cash movements.

Therefore:

Waterfall Data ≠ Bank Transactions Alone

Section X — Economic Event Classification

73. A More Complete Event Model

Part I introduced:

Date + Amount + Economic Classification + Economic Population

Part III allows this to be expanded.

A waterfall event may need:

• economic date;
• amount;
• currency;
• event type;
• investment;
• investor population;
• vehicle;
• carry pocket;
• economic stream;
• recallability;
• recycling status;
• realised/unrealised status;
• return-of-capital treatment;
• preferred-return treatment;
• expense classification.

Not every waterfall needs every field.

But the data model must be capable of representing the economics that actually exist.

74. Classification Determines Behaviour

Consider three €5 million events.

Event A

Investment contribution.

Event B

Management-fee contribution.

Event C

Broken-deal expense.

All are:

€5m

But they may have different treatment for:

• return of capital;
• preferred return;
• carry base;
• investment attribution;
• recycling;
• investor allocation.

Therefore:

Amount Does Not Determine Economic Behaviour

Classification does.

Section Y — Calculation Order

75. Perimeter Before Formula

A robust calculation should follow:

Step 1

Identify economic population.

Step 2

Identify relevant events.

Step 3

Classify those events.

Step 4

Determine applicable economic perimeter.

Step 5

Update waterfall state.

Step 6

Apply hurdle and allocation formulas.

Step 7

Calculate carry.

Step 8

Reconcile.

Therefore:

Population → Perimeter → Classification → State → Formula → Carry

not:

Formula → Search for Inputs

76. Why Calculation Order Matters

Suppose:

• profitable investment gain = €50m;
• written-off investment loss = €25m;
• relevant expenses = €5m;
• carry = 20%.

Correct net carry base:

€50m − €25m − €5m = €20m

Carry:

€4m

If the model first calculates carry on the gain:

€50m × 20% = €10m

and then merely deducts the €30 million losses and expenses from LP value without recalculating carry, it has preserved too much GP carry.

Therefore:

Correct Inputs + Correct Rules + Wrong Sequence = Wrong Carry

Section Z — Reconciliation Controls

77. Investment Reconciliation

For each investment:

Cost + Gain/(Loss) = Proceeds or Current Value

For example:

A:

€20m + €40m = €60m

B:

€30m − €10m = €20m

C:

€25m − €25m = €0m

D:

€25m + €15m = €40m

This provides a first economic reconciliation.

78. Fund Reconciliation

Total investment cost:

€100m

Net investment gain:

€20m

Total proceeds plus NAV:

€120m

Check:

€100m + €20m = €120m

Then include other costs separately.

This prevents investment performance and fund-level expenses from becoming unintentionally mixed.

79. Pocket Reconciliation

Where carry pockets exist:

Sum of Pocket Events = Relevant Fund Events

But:

Sum of Pocket Carry ≠ Necessarily Carry on Aggregated Fund Events

The first is a data reconciliation.

The second is an economic calculation.

They should not be confused.

80. Stream Reconciliation

Likewise:

Income Stream + Capital-Gain Stream + Other Defined Streams = Total Classified Economic Return

But again:

Carry(Stream A) + Carry(Stream B) ≠ Necessarily Carry(Aggregated Streams)

when different waterfall rules apply.

81. Expense Reconciliation

A useful expense control is:

Total Fund Expenses

=

Expenses Included in Waterfall

Expenses Excluded from Waterfall

subject to any allocation between economic populations.

This helps ensure that expenses do not disappear merely because they are excluded from one particular carry calculation.

Section AA — Scenario Testing

82. Whole-Fund Versus Deal-by-Deal

Every model intended to support flexible waterfall architectures should be tested using a portfolio containing:

• at least one large gain;
• one modest gain;
• one loss;
• one complete write-off.

This exposes cross-collateralisation differences clearly.

83. Write-Down Testing

Test the same unrealised investment at:

• cost;
• 75% of cost;
• 50% of cost;
• zero;
• above cost.

Observe whether:

• carry decreases;
• carry is unchanged;
• carry increases.

The expected behaviour should match the governing economics.

84. Expense Testing

Run the same portfolio with:

• no expenses;
• management fees only;
• management fees plus fund expenses;
• all relevant costs.

This makes the economic perimeter visible.

85. Pocket Testing

Construct:

• one strongly performing pocket;
• one poorly performing pocket.

Then calculate:

1. separately;
2. aggregated.

If both calculations produce the same result despite materially different performance, verify whether that is genuinely intended.

86. Split-Stream Testing

Construct:

• one stream with high performance;
• one with low or negative performance.

Apply different carry rules.

Then deliberately aggregate the streams and compare.

This provides a direct control against accidental aggregation.

Section AB — Comprehensive Worked Case

87. Fund Facts

Consider a fund with:

Commitments: €200m

For this example, assume the following relevant economic history.

Investments

Investment gain:

€50m

Other costs:

• management fees = €15m;
• fund expenses = €5m;
• broken-deal costs = €3m;
• financing costs = €2m.

Total other costs:

€25m

Net economic value above investments and other costs:

€200m − €150m − €25m = €25m

Assume:

• carry = 20%;
• ignore preferred return initially.

We will calculate several architectures.

88. Case 1 — Pure Deal-by-Deal on Realisations

Alpha

Cost:

€40m

Proceeds:

€100m

Profit:

€60m

Carry:

€12m

Beta

Loss:

€10m

Carry:

€0m

Gamma has been written off but is not part of this simplified realised-deal calculation.

Delta and Epsilon are unrealised.

Current carry:

€12m

89. Case 2 — Include Realised Losses and Write-Offs

Alpha:

+€60m

Beta:

−€10m

Gamma:

−€25m

Net:

€25m

Carry:

€5m

The carry falls from:

€12m → €5m

because broader losses are now cross-collateralised.

90. Case 3 — Include All Investment Value

Delta:

Cost €35m.

NAV €50m.

Gain:

€15m

Epsilon:

Cost €20m.

NAV €30m.

Gain:

€10m

Add to the €25 million net realised/written-off position:

€25m + €15m + €10m = €50m

Carry:

€10m

This represents a total-investment-value calculation rather than realised carry.

91. Case 4 — Net of All Relevant Fund Costs

Investment gain:

€50m

Other costs:

€25m

Net:

€25m

Carry:

€5m

Again, the same underlying fund supports different carry calculations depending on the question being asked.

92. Add a Preferred Return

Now assume the relevant preferred-return requirement is:

€20m

and:

• full catch-up;
• 20% residual carry.

Net profit after all relevant costs:

€25m

First €20 million goes to LP as preferred profit.

Remaining:

€5m

The full catch-up requirement on €20 million is:

€5m

Therefore all remaining profit goes to GP catch-up.

GP carry:

€5m

LP profit:

€20m

Total profit:

€25m

GP share:

20%

The waterfall finishes exactly at the end of the catch-up tier.

93. Reduce the Fund Value

Suppose Delta's NAV falls from:

€50m → €40m

Investment gain falls by:

€10m

Net fund profit after costs becomes:

€15m

This is below the €20 million preferred-return requirement.

Carry becomes:

€0m

A €10 million reduction in NAV has reduced calculated carry by:

€5m

not:

€10m × 20% = €2m

because the fund crossed a waterfall boundary.

This reinforces:

Change in Fund Value × Headline Carry Percentage ≠ Necessarily Change in Carry

94. Increase the Fund Value

Instead suppose Delta rises:

€50m → €70m

Additional gain:

€20m

Net profit becomes:

€45m

Waterfall:

LP preferred:

€20m

GP catch-up:

€5m

Remaining:

€20m

Residual carry:

€4m

Total GP:

€9m

Check:

€9m / €45m = 20%

A €20 million increase in value has increased carry from €5 million to €9 million:

Increase = €4m

Once the waterfall was beyond catch-up, the marginal carry returned to 20%.

Section AC — Architecture as a Calculation Specification

95. The Architecture Must Be Explicit

Before implementing a waterfall, the specification should answer:

Economic population

Which investments, investors, vehicles, pockets or streams belong together?

Return-of-capital perimeter

Which contributions must be returned?

Expense perimeter

Which fees and expenses reduce the carry base?

Preferred-return perimeter

Which contributions earn preferred return?

Loss recognition

When do:

• realised losses;
• write-offs;
• write-downs

enter the calculation?

Unrealised value

Does NAV:

• enter the calculation;
• act only as a protective test;
• remain excluded?

Recycling

How do recycled and recallable distributions affect state?

Non-cash events

How are distributions in kind valued and dated?

Only after these questions are answered should the formulas from Part II be applied.

96. The Architecture Determines the State

A waterfall is not merely a formula applied to a distribution.

It maintains economic state.

That state can include:

• unreturned investment capital;
• unreturned fee contributions;
• accrued preferred return;
• realised gains;
• realised losses;
• write-offs;
• write-downs;
• unrealised value;
• recycled amounts;
• recallable amounts;
• carry by pocket;
• carry by stream;
• carry previously generated.

Therefore:

Economic Architecture → State Definition

and:

State Definition → Calculation Result

If the wrong state variables are maintained, the model can be mathematically perfect and economically wrong.

Section AD — What Part III Has Established

97. The Central Principle

Part II demonstrated that:

Correct Hurdle Calculation Requires Correct Time and Performance Mechanics

Part III adds another requirement:

Correct Hurdle Calculation + Wrong Economic Perimeter = Wrong Carry

A waterfall calculation therefore cannot begin with the carry percentage.

It must begin by identifying the economic population.

98. Whole-Fund and Deal-by-Deal Are Economic Perimeters

A whole-fund waterfall allows gains and losses across the relevant fund population to interact.

A deal-by-deal waterfall allows defined investments to generate carry more independently.

Hybrid structures exist between those endpoints.

Therefore:

Pure Deal-by-Deal ← Hybrid Economics → Whole-Fund

The label alone does not determine the calculation.

The actual cross-collateralisation rules do.

99. Loss Recognition Is Part of the Architecture

The treatment of:

• realised losses;
• write-offs;
• write-downs;
• unrealised gains;

can materially change carry.

Therefore:

No Cash Flow ≠ No Waterfall Event

and:

Realised Status ≠ Sole Determinant of Economic Relevance

100. Gross Versus Net Requires a Defined Perimeter

The phrase:

net carry

is incomplete without specifying what is deducted.

Potential components include:

• management fees;
• fund expenses;
• broken-deal costs;
• financing costs;
• other amounts.

Therefore:

Gross or Net of What?

is the correct question.

101. One Fund Can Contain Several Economic Waterfalls

Carry pockets and split streams demonstrate that:

One Legal Fund ≠ Necessarily One Carry Pool

and:

One Fund ≠ One Economic Stream ≠ Necessarily One Waterfall

Consequently:

Ability to Aggregate Data ≠ Economic Validity of Aggregation

102. Cash Is Not Enough

Recycling, recallable distributions, write-offs, write-downs and distributions in kind demonstrate that:

Cash Movement ≠ Economic Classification

and:

Waterfall Data ≠ Bank Transactions Alone

A waterfall requires economic events.

103. Classification Comes Before Calculation

The architecture developed in this Part can be summarised as:

Economic Population

↓

Economic Perimeter

↓

Event Classification

↓

Waterfall State

↓

Performance Tests

↓

Allocation Tiers

↓

Carry

↓

Reconciliation

The formulas operate only after the economics have been defined.

104. Transition to Part IV

Part III has largely treated the relevant economic population as though all investors participate in it identically.

That assumption can now be removed.

Real funds can contain investors with:

• different closing dates;
• different contribution histories;
• equalisation;
• excused investments;
• different fee arrangements;
• different side-letter economics;
• different classes;
• different participation in investments;
• different exposure to expenses.

Once these differences exist, another fundamental question arises:

Can the waterfall be calculated at fund level and then allocated to investors, or must it be calculated separately for individual investors or investor populations?

That question introduces the problem of waterfall linearity.

In some circumstances:

W(A + B) = W(A) + W(B)

In others:

W(A + B) ≠ W(A) + W(B)

Part IV therefore moves from the economic perimeter of investments and costs to the economic perimeter of investors and vehicles.

It will develop:

• fund-level versus investor-level calculations;
• proportional investors;
• aggregation linearity;
• non-linearity;
• excused investors;
• investor-specific economics;
• subsequent closings;
• equalisation;
• multiple investor populations;
• parallel vehicles;
• aggregation across vehicles; and
• disaggregation of the resulting carry.

The central question becomes:

When can economic populations safely be combined before the waterfall is calculated?

The governing principle is:

Calculate Then Aggregate ≠ Necessarily Aggregate Then Calculate

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

[email protected]

Or ask your questions here:

References and Further Reading

Carried Interest and Waterfall Architecture

• Stefanova, Mariya (ed.). The Definitive Guide to Carried Interest. Private Equity International, 2017. See in particular the chapters addressing carried-interest structures, distribution waterfalls, calculation methodologies, clawback and the practical implementation of 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.
• Institutional Limited Partners Association (ILPA). ILPA Principles 3.0: Fostering Transparency, Governance and Alignment of Interests for General and Limited Partners. 2019. See particularly the principles concerning carried interest, distribution waterfalls, preferred returns, clawback, fees and expenses, subscription facilities and alignment of interests.
• Invest Europe. Professional Standards Handbook. See particularly the sections concerning fund economics, distribution waterfalls, carried interest, hurdle rates, catch-up provisions, fees and expenses, fund documentation and alignment between GPs and LPs.

Whole-Fund, Deal-by-Deal and Hybrid Waterfalls

• Institutional Limited Partners Association (ILPA). ILPA Principles 3.0. 2019. See particularly the guidance supporting whole-of-fund approaches to carried interest, the return of contributed capital before carried interest distributions, and mechanisms designed to reduce the risk of excess interim carried interest.
• Institutional Limited Partners Association (ILPA). Private Equity Principles. Earlier editions. See the discussion of carried-interest waterfalls, whole-fund versus deal-by-deal structures, preferred returns, clawback and alignment of interests.
• Invest Europe. Professional Standards Handbook — Terms in the Fund Documents. See particularly the discussion of distribution waterfalls, carried interest, preferred returns, catch-up, escrow and clawback provisions.
• Metrick, Andrew and Ayako Yasuda. Venture Capital and the Finance of Innovation. Wiley. See the treatment of private fund economics, carried interest, management fees, distribution waterfalls and GP compensation.
• Gompers, Paul A. and Josh Lerner. The Venture Capital Cycle. MIT Press. See the discussion of limited-partnership economics, carried interest, compensation arrangements and contractual alignment between general and limited partners.

Write-Offs, Write-Downs and Unrealised Investments

• Institutional Limited Partners Association (ILPA). ILPA Principles 3.0. 2019. See particularly the provisions concerning calculation and distribution of carried interest, unrealised investments, NAV-based protections and clawback.
• International Private Equity and Venture Capital Valuation Guidelines (IPEV). International Private Equity and Venture Capital Valuation Guidelines. See particularly the principles governing fair-value measurement of private capital investments, changes in valuation, impairment and the use of valuation information throughout the life of a fund.
• IFRS Foundation. IFRS 13 — Fair Value Measurement. Reference source for the principles governing fair-value measurement where accounting fair values or NAV information are inputs to fund reporting and related economic analysis.

Management Fees, Fund Expenses and Net Fund Economics

• Institutional Limited Partners Association (ILPA). ILPA Principles 3.0. 2019. See particularly the principles concerning management fees, portfolio-company fees, fee offsets, fund expenses, organisational expenses, broken-deal expenses and transparency of costs borne by LPs.
• Institutional Limited Partners Association (ILPA). ILPA Reporting Template and Reporting Guidance. See the reporting framework for management fees, partnership expenses, offsets, carried interest, contributions and distributions.
• Institutional Limited Partners Association (ILPA). ILPA Fee Reporting Template. Reference framework for the classification and reporting of management fees, partnership expenses, offsets and other amounts affecting LP economics.
• U.S. Securities and Exchange Commission. Private Fund Adviser Resources and Guidance. See the Commission's guidance and enforcement materials concerning allocation of fees and expenses, disclosure, conflicts of interest and private-fund adviser practices.
• Invest Europe. Professional Standards Handbook. See particularly the guidance concerning management fees, transaction fees, fee offsets, partnership expenses, broken-deal costs and allocation of fund expenses.

Management Fee Offsets and Fee Waivers

• Institutional Limited Partners Association (ILPA). ILPA Principles 3.0. 2019. See the principles concerning portfolio-company fees, management-fee offsets, transparency and the allocation of economic benefits between the manager and the fund.
• Institutional Limited Partners Association (ILPA). ILPA Reporting Template and Reporting Guidance. See the treatment and reporting of management fees, offsets, rebates and partnership expenses.
• U.S. Securities and Exchange Commission. Investment Management — Private Fund Adviser Resources. See relevant guidance and enforcement materials concerning management fees, fee offsets, expense allocation and disclosure.

Broken-Deal Costs and Other Fund Expenses

• Institutional Limited Partners Association (ILPA). ILPA Principles 3.0. 2019. See particularly the principles concerning allocation of broken-deal expenses, organisational costs, partnership expenses and expenses associated with transactions that are not ultimately completed.
• Invest Europe. Professional Standards Handbook. See the guidance concerning fund expenses, transaction costs, aborted transaction costs and the allocation of expenses between the fund, manager and portfolio companies.

Subscription Facilities and Financing Costs

• Institutional Limited Partners Association (ILPA). Subscription Lines of Credit and Alignment of Interests: Considerations and Best Practices for Limited and General Partners. June 2017. See particularly the discussion of subscription facilities, preferred-return calculations, IRR effects, financing costs, disclosure and alignment of interests.
• Institutional Limited Partners Association (ILPA). ILPA Principles 3.0. 2019. See particularly the guidance concerning subscription facilities, fund-level leverage, transparency and the effect of financing arrangements on fund economics and reported performance.

Recycling and Recallable Distributions

• Institutional Limited Partners Association (ILPA). ILPA Principles 3.0. 2019. See particularly the guidance concerning recycling provisions, recallable distributions, reinvestment of proceeds and the calculation and reporting of contributed and distributed capital.
• Institutional Limited Partners Association (ILPA). ILPA Reporting Template and Reporting Guidance. See the definitions and reporting treatment of contributions, distributions, recallable distributions, recycled capital and related fund cash flows.
• Invest Europe. Professional Standards Handbook. See the sections concerning commitments, drawdowns, distributions, recycling, reinvestment and recallable amounts.

Distributions in Kind

• Institutional Limited Partners Association (ILPA). ILPA Principles 3.0. 2019. See particularly the principles concerning distributions in kind, valuation, LP treatment and alignment of interests.
• International Private Equity and Venture Capital Valuation Guidelines (IPEV). International Private Equity and Venture Capital Valuation Guidelines. See the valuation principles relevant to determining the fair value of private and publicly traded investments where securities or other assets are distributed rather than cash.
• Invest Europe. Professional Standards Handbook. See the guidance concerning distributions, valuation and distributions of assets or securities in kind.

Multiple Economic Populations, Carry Pools and Investment Segregation

• Invest Europe. Professional Standards Handbook — Terms in the Fund Documents. See particularly the guidance concerning investment strategy, allocation of investments, carried interest, co-investment arrangements, parallel structures and the economic terms established in fund documentation.
• Institutional Limited Partners Association (ILPA). ILPA Principles 3.0. 2019. See the principles concerning allocation of investment opportunities, investor-specific arrangements, conflicts of interest, co-investments, parallel vehicles and transparency of economic terms.
• Institutional Limited Partners Association (ILPA). Model Limited Partnership Agreement. See the model provisions and accompanying materials concerning capital contributions, distributions, carried interest, allocations, recycling, expenses and related fund economics.

Fund Reporting and Economic Classification

• Institutional Limited Partners Association (ILPA). ILPA Reporting Template and Reporting Guidance. Reference framework for the classification and reporting of capital contributions, distributions, management fees, partnership expenses, carried interest and other components of private-fund economics.
• Institutional Limited Partners Association (ILPA). Performance Template. See the reporting framework for investment-level and fund-level cash flows, performance information and reconciliation of private-market investment economics.
• Invest Europe. Investor Reporting Guidelines. See the guidance concerning fund-level and portfolio-level reporting, commitments, contributions, distributions, NAV, fees, expenses and carried interest.

Further Reading

• Phalippou, Ludovic. Private Equity Laid Bare. Routledge. See particularly the discussion of private equity fund economics, management fees, carried interest, investment performance and the economic consequences of different fund structures.
• Kaplan, Steven N. and Antoinette Schoar. “Private Equity Performance: Returns, Persistence, and Capital Flows.” The Journal of Finance, Vol. 60, No. 4, 2005, pp. 1791–1823. Useful background on private equity fund cash flows, performance measurement and the economic characteristics of private equity funds.
• Robinson, David T. and Berk A. Sensoy. “Do Private Equity Fund Managers Earn Their Fees? Compensation, Ownership, and Cash Flow Performance.” The Review of Financial Studies, Vol. 26, No. 11, 2013, pp. 2760–2797. Empirical analysis of private equity compensation structures, management fees, carried interest and fund cash-flow performance.
• Harris, Robert S., Tim Jenkinson and Steven N. Kaplan. “Private Equity Performance: What Do We Know?” The Journal of Finance, Vol. 69, No. 5, 2014, pp. 1851–1882. Further reading on private equity cash flows, performance and the measurement of fund-level economic outcomes.

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