# European Waterfall

The **European waterfall** (also called the **whole-fund waterfall**) is the distribution model dominant in European private equity and increasingly standard globally. Under this model, the GP earns no [carried interest](/waterfall-and-distributions/carried-interest.md) until all LPs, across the entire fund, have received back 100% of contributed capital plus the [preferred return](/waterfall-and-distributions/preferred-return.md).

## How It Works

The four tiers are applied to every distribution, measuring cumulative fund-wide progress:

```
Tier 1 — Return of capital
  LP receives 100% until cumulative LP distributions = total LP paid-in capital (fund-wide)

Tier 2 — Preferred return
  LP receives 100% until cumulative LP distributions = paid-in capital + accrued 8% p.a. hurdle

Tier 3 — GP catch-up
  GP receives 100% (or agreed ratio) until GP distributions = agreed carry % of total profits

Tier 4 — Residual profits
  Split 80% LP / 20% GP (or as agreed in the LPA)
```

"Fund-wide" is key: a GP with three strong early exits still cannot touch carry if other LP capital has not been returned and the preferred return not met across the whole portfolio.

## Worked Example

Fund size: €100M. Two exits. Preferred return: 8% p.a. Carry: 20%.

**After Exit 1 (€60M proceeds):**

* Tier 1: €60M → LPs (partial return of capital). GP: €0. Carry: €0.

**After Exit 2 (€80M proceeds, after the €40M remaining capital is returned + hurdle clears):**

* Tier 1: remaining capital returned → LPs.
* Tier 2: accrued preferred return → LPs.
* Tier 3: GP catch-up.
* Tier 4: residual profit split 80/20.

## LP-Protective Properties

The European model protects LPs in two key ways:

1. **No early carry extraction.** A GP cannot receive carry off a single strong exit while other LPs wait for capital return on underperforming positions.
2. **Low clawback risk.** Because the GP only earns carry after fund-wide capital is returned, there is rarely a scenario where carry taken must be clawed back at wind-down.

## Relationship to Clawback

[Clawback](/waterfall-and-distributions/clawback.md) provisions are still present in European waterfall LPAs but are rarely triggered under normal fund operation. They serve as a backstop for edge cases (e.g., a distribution that was partially funded by recallable capital that was later called back).

## How Gildi Implements It

When a fund is configured with a European waterfall, Gildi tracks cumulative fund-wide paid-in capital returned and preferred return accrued as global counters. Each distribution first exhausts the remaining Tier 1 balance before proceeding to Tier 2, and so on. The GP carry account is only credited once Tier 3 is reached.


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