# Investments / Investeringar

# Thursday Terminology

Waterfall distribution

The waterfall is perhaps the most talked about concept in private equity (together with carried interest).

So let´s find out what it is. It’s basically about how the cash - the end result of the investments made - is to be distributed between the investors and the investment manager.

A basic model has four steps: Only when an earlier stage is completed will any distribution trickle down and be distributed according to the step thereafter.

1. The investors get all of their invested cash back. (If you put in 100 into the fund you are to get 100 out of it before any profit split with the manager takes place.)

2. The investors get a preferred interest on the invested cash back. (If you put in 100 you want 8 % return on that cash before any profit split with the manager takes place.)

3. The manager will get a catch up so that it gets 20 % of the paid cash in step 2 (and step 3).

4. Profit split 80 / 20 - 80 % goes to the investors and 20 % goes to the manager.

The waterfall illustrates that the cash will trickle down the prioritized order, and if it does not suffice to reach the next step then the payments based on the next step, and any steps thereafter, will be zero.

The purpose of the model is to create the optimal incentive between the parties to maximize the total return on the investment. And of course, figures and configuration can be tweaked in a number of creative manners!

*Stockholm, 2023-11-23*

*Author: Katarina Strandberg *

So let´s find out what it is. It’s basically about how the cash - the end result of the investments made - is to be distributed between the investors and the investment manager.

A basic model has four steps: Only when an earlier stage is completed will any distribution trickle down and be distributed according to the step thereafter.

1. The investors get all of their invested cash back. (If you put in 100 into the fund you are to get 100 out of it before any profit split with the manager takes place.)

2. The investors get a preferred interest on the invested cash back. (If you put in 100 you want 8 % return on that cash before any profit split with the manager takes place.)

3. The manager will get a catch up so that it gets 20 % of the paid cash in step 2 (and step 3).

4. Profit split 80 / 20 - 80 % goes to the investors and 20 % goes to the manager.

The waterfall illustrates that the cash will trickle down the prioritized order, and if it does not suffice to reach the next step then the payments based on the next step, and any steps thereafter, will be zero.

The purpose of the model is to create the optimal incentive between the parties to maximize the total return on the investment. And of course, figures and configuration can be tweaked in a number of creative manners!

*Stockholm, 2023-11-23*

*Author: Katarina Strandberg *