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Don’t Go Chasing Waterfalls … Without Consulting Practical Guidance!

January 17, 2023

Sponsors organize and operate private equity funds to generate profits for themselves and their investors. The two primary ways in which fund sponsors are compensated for their efforts are through a management fee and a carried interest, or performance, fee. This second type of compensation, carried interest, is made possible through a technical and heavily negotiated provision in a fund’s limited partnership or operating agreement: the distribution waterfall. This practice note provides a general overview of what distribution waterfalls are in the context of private equity funds; identifies basic types of distribution waterfalls, their general operation, and mechanics by way of example; and suggests related topics for consideration when drafting, reviewing, and negotiating distribution waterfall provisions. 

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