Definition
Waterfall
The order in which an SPV distributes proceeds among LPs and the sponsor.
A waterfall is the formula that governs how proceeds from an SPV's exit or distribution are split between LPs and the sponsor. A typical SPV waterfall has four tiers: (1) return of contributed capital to LPs, (2) preferred return to LPs (if a hurdle is used), (3) GP catch-up, and (4) the carry split — commonly 80% to LPs and 20% to the sponsor — on remaining profits. The waterfall is encoded in the operating agreement and run by the fund administrator at each distribution event.