# Distribution Waterfall

The **distribution waterfall** is the contractual sequence governing how cash from portfolio exits is divided between LPs and the GP. It ensures LPs recover contributed capital and a minimum return before the GP earns any profit share.

The exact tiers, hurdle rates, and carry percentages are defined in the fund's LPA and may be modified by side letters for specific LPs.

## The Standard Four-Tier Waterfall

Most closed-end PE funds use a four-tier waterfall:

| Tier                 | Who receives           | Until                                                                       |
| -------------------- | ---------------------- | --------------------------------------------------------------------------- |
| 1. Return of capital | LPs — 100%             | LPs have received back all paid-in capital                                  |
| 2. Preferred return  | LPs — 100%             | LPs have earned the agreed hurdle rate (e.g., 8% p.a.) on all contributions |
| 3. GP catch-up       | GP — 100% (or partial) | GP has caught up to the agreed carry split                                  |
| 4. Residual profits  | LPs 80% / GP 20%       | Fund wind-down                                                              |

See [Preferred Return](/waterfall-and-distributions/preferred-return.md), [GP Catch-Up](/waterfall-and-distributions/catch-up.md), and [Carry](/waterfall-and-distributions/carry.md) for how each tier is calculated.

## European vs American Waterfall

The two main waterfall models differ on *when* the GP earns carry:

|               | European (whole-fund)                               | American (deal-by-deal)                               |
| ------------- | --------------------------------------------------- | ----------------------------------------------------- |
| Carry timing  | After full fund capital + preferred return returned | After each deal's capital + preferred return returned |
| LP protection | High — GP waits for fund-wide performance           | Lower — GP can earn carry early on strong deals       |
| Clawback risk | Low                                                 | High — early carry may need to be returned            |
| Common in     | European funds, increasingly global                 | US-based funds                                        |

See [European Waterfall](/waterfall-and-distributions/waterfall-european.md) and [American Waterfall](/waterfall-and-distributions/waterfall-american.md) for a full comparison.

## Recallable Distributions

Some waterfalls permit the GP to **recall** return-of-capital distributions — recalling reinstates the LP's [unfunded commitment](/fund-mechanics/unfunded.md) so the GP can call that capital again. Whether distributions are recallable and within what time window is defined per-fund in the LPA.

## How Gildi Applies the Waterfall

When a GP creates a distribution in Gildi, the system:

1. Reads the fund's waterfall configuration (model, hurdle rate, carry %, catch-up ratio, recallable flag).
2. Computes each LP's return-of-capital balance, accrued preferred return, and profit entitlement as of the distribution date.
3. Splits the gross distribution amount across the four tiers per LP.
4. Generates a distribution notice PDF showing each LP's tier breakdown.
5. Updates each LP's [DPI](/reporting-and-metrics/dpi.md) and [TVPI](/reporting-and-metrics/tvpi.md) on settlement.


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