Carried Interest Waterfall Calculator

What is the European Waterfall Model?

The European Waterfall model is a method for distributing profits between General Partners (GPs) and Limited Partners (LPs) in a private equity or hedge fund. Unlike the American (deal-by-deal) model, the European model evaluates performance on a whole-fund basis. This means GPs only begin to earn carried interest (performance fees) after the LPs have had their entire initial capital contribution plus a preferred return (hurdle rate) paid back to them.

The waterfall typically proceeds through four distinct phases:

1. Return of Capital: 100% of distributions go to LPs until their entire contributed capital is returned.
2. Preferred Return (Hurdle): 100% of distributions go to LPs until they achieve a predefined hurdle rate on their capital.
3. Catch-up: Distributions go primarily (or entirely) to the GP until the GP's share of profits meets the target carried interest percentage.
4. 80/20 Split: Remaining distributions are split between LPs and GPs based on the agreed carried interest rate (e.g., 80% to LPs, 20% to GPs).

This model aligns the GP's incentives with the overall success of the fund, ensuring LPs are protected from early losses. For more insights into fund structures, check out our Fund of Funds Double Fee Drag Calculator or the Fund Breakeven AUM Calculator to understand operational economics.