American vs European Waterfall: How We Handle Both

When you're modeling private fund cashflows, waterfall structure matters enormously.

A GP might earn $8M in carry** under American waterfall but **$2M under European waterfall—same fund, same performance, different structure.

If you model the wrong waterfall, your distribution forecasts can be off by 2-3 years and millions of dollars.

This post explains the difference and how Nagare handles both structures accurately.

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The Two Waterfall Models

American Waterfall (Deal-by-Deal)

Carry is calculated and paid on EACH exit individually:

1. Investment exits → Calculate gain on that deal
2. If gain exceeds hurdle → GP gets carry (typically 20%)
3. LP gets distribution AFTER carry deduction
4. Repeat for each subsequent exit

Key characteristic: GP can earn carry on early wins even if later deals lose money.

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European Waterfall (Whole Fund)

Carry is calculated on the ENTIRE fund AFTER all capital is returned:

1. Distributions to LPs FIRST until 100% capital returned
2. Then preferred return (typically 8%)
3. ONLY THEN does GP earn carry on profits
4. Carry is calculated on whole fund (not deal-by-deal)

Key characteristic: LPs get all distributions first. GP waits until fund is in profit overall.

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Example: Same Fund, Different Waterfall

Fund details:

• Capital commitment: $100M
• Invested: $100M across 10 companies
• Exits: 3 big wins, 4 ok, 3 zeros

Exit timeline:

Fund-level performance:

• Invested: $100M
• Returned: $123M
• Profit: $23M (after accounting for losses)
• TVPI: 1.23x
• IRR: ~8%

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Under American Waterfall (Deal-by-Deal):

Year 3 (Company A exit: $45M proceeds,$35M gain):

• Gain: $35M
• GP carry (20%): $7M ← GP GETS PAID NOW
• To LP: $38M

Year 5 (Company C exit: $30M proceeds,$20M gain):

• Gain: $20M
• GP carry (20%): $4M ← GP GETS PAID NOW
• To LP: $26M

Year 7 (Company E exit: $20M proceeds,$10M gain):

• Gain: $10M
• GP carry (20%): $2M ← GP GETS PAID NOW
• To LP: $18M

Total GP carry: $7M +$4M + $2M = **$13M**

Total to LP: $38M +$26M + $18M +$8M + $5M +$15M = $110M

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Under European Waterfall (Whole Fund):

Years 3-7 (All exits):

• Total proceeds: $123M
• Return capital first: $100M to LP
• Remaining: $23M profit

After 8% preferred return:

• Preferred: $100M × 8$25M (simplified)
• Fund didn't exceed preferred return threshold
• GP carry: $0 ← GP GETS NOTHING (or minimal)

Total to LP: ~$123M (nearly all proceeds)

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The Difference:

GP carry difference: $13M vs$0M Distribution timing: 2-3 years earlier under American LP gets: $12M more under European

If you model American waterfall for a European fund, your cashflow forecasts will be completely wrong.

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Why This Matters for Your Projections

Impact 1: Distribution Timing

American waterfall:

• Distributions start Year 3 (first exit)
• GP takes 20% carry immediately
• Steady distributions throughout fund life

European waterfall:

• Distributions start Year 3 BUT no carry deduction
• GP carry only after Year 8 (when fund is profitable)
• You get MORE cash earlier (no carry taken)

Liquidity planning impact:

• If you model American for European fund, you underestimate early distributions by 20%
• $10M exit → You model$8M to LP (after carry) → Actually $10M to LP
• Your liquidity forecast is $2M short

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Impact 2: GP Economics

Under American:

• GP incentivized to exit winners early (get carry now)
• Can ignore losers (already got paid on winners)

Under European:

• GP incentivized to wait for fund-level profitability
• Must manage losers carefully (affect whole fund carry)
• May hold winners longer to offset losers

Strategic impact: Exit timing behavior differs.

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Impact 3: Fund Selection

When evaluating two similar funds:

Fund A (American waterfall):

• TVPI: 2.0x
• IRR: 15%
• GP carry: $20M

Fund B (European waterfall):

• TVPI: 2.0x
• IRR: 15%
• GP carry: $8M

Same performance, but European waterfall means:

• You (LP) get $12M more
• Net TVPI to you: Higher under European
• All else equal, European waterfall is better for LPs

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How Nagare Handles Both

Fund-Level Configuration

When creating a fund, specify waterfall type:

{
  fundId: 'FUND-XYZ',
  name: 'European Buyout Fund II',

  // Waterfall configuration
  waterfallType: 'EUROPEAN',  // or 'AMERICAN'

  carriedInterest: 0.20,      // 20% carry
  preferredReturn: 0.08,      // 8% hurdle

  // European-specific
  wholeFundHurdle: true,      // Return all capital before carry
  catchUp: 1.0                // 100% catch-up (if applicable)
}

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Automatic Carry Calculation

American waterfall (deal-by-deal):

// On each exit
for (const exit of exits) {
  const gain = exit.proceeds - exit.invested;

  if (gain > 0) {
    const carry = gain × carriedInterest;  // 20% of gain
    const toLp = exit.proceeds - carry;

    distributions.push({
      date: exit.date,
      amount: toLp,
      carry: carry  // GP gets this now
    });
  }
}

European waterfall (whole fund):

// After ALL exits
const totalProceeds = exits.sum(e => e.proceeds);
const totalInvested = 100_000_000;
const capitalReturned = Math.min(totalProceeds, totalInvested);

// LPs get capital back first
distributions.push({
  type: 'RETURN_OF_CAPITAL',
  amount: capitalReturned,
  carry: 0  // No carry yet
});

// Only if profitable overall
if (totalProceeds > totalInvested) {
  const profit = totalProceeds - totalInvested;
  const preferredAmount = totalInvested × preferredReturn × avgYears;

  if (profit > preferredAmount) {
    const carryBase = profit - preferredAmount;
    const carry = carryBase × carriedInterest;
    const toLp = carryBase - carry;

    distributions.push({
      type: 'PROFIT_DISTRIBUTION',
      amount: toLp,
      carry: carry  // GP finally gets carry (years later)
    });
  }
}

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Modeling Example: UK Buyout Fund

Fund parameters:

• Structure: European waterfall
• Commitment: £50M
• Carry: 20%
• Hurdle: 8% preferred return
• Vintage: 2020

Exit sequence:

Cashflow Projections:

2023 Distribution (Exit A: £15M proceeds):

• Return of capital: £10M to LP
• Remaining: £5M held (not yet returned all capital)
• GP carry this year: £0 ← Key difference from American

2024 Distribution (Exit B: £20M proceeds):

• Return of capital: £20M to LP (now £30M returned, £20M still out)
• GP carry this year: £0 ← Still returning capital

2025 Distribution (Exit C: £18M proceeds):

• Return of capital: £18M to LP (now £48M returned, £2M still out)
• GP carry this year: £0 ← Almost all capital back

2026-2027 (Final exits: £12M proceeds):

• Return final £2M capital
• Total returned: £50M (100% capital back)
• Profit: £15M (proceeds exceeded capital)
• Preferred return: £50M × 8% × 5 years = £16M
• Profit < Preferred → GP carry: £0

Total GP carry: £0 Total to LP: £65M

Under American waterfall:

• GP would have earned ~£6M in carry (20% on £8M + £12M + £10M gains)
• LP would have gotten £59M
• £6M difference

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When to Use Which Waterfall

Most US funds: American (deal-by-deal) Most UK/EU funds: European (whole fund) Some funds: Hybrid or modified structures

Check your fund documents:

• Look for "carry distribution" clauses
• Search for "whole fund" vs "deal-by-deal"
• Ask GP if unclear

In Nagare:

• Set waterfallType when creating fund
• Projections automatically use correct model
• Can compare both side-by-side if evaluating funds

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Impact on Portfolio Projections

If you have 20 funds:

• 15 American waterfall (mostly US)
• 5 European waterfall (UK/EU)

Modeling ALL as American:

• Overstates GP carry by ~15-20% on EU funds
• Understates early distributions to you
• Liquidity forecast is wrong

Modeling correctly:

• European funds: More cash early (no carry taken)
• American funds: Less cash early (carry taken on each exit)
• Blended portfolio cashflows are accurate

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Technical Implementation Details

Carry Calculation Variants

1. American with Catch-Up:

• GP gets 0% until hurdle met
• Then 100% until caught up to 20% of total profits
• Then 80/20 split (LP/GP)

2. European with Catch-Up:

• Return all capital + preferred
• Then GP catches up to 20%
• Then 80/20 split

3. Hybrid Models:

• Deal-by-deal but with clawback provisions
• Whole fund but with interim distributions
• Custom structures (negotiated per fund)

Nagare supports:

• Standard American
• Standard European
• Custom configurations (contact us for complex structures)

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When Waterfall Choice Matters Most

High Impact Scenarios:

1. Fund Returns 1.5x - 2.0x TVPI:

• American: GP gets some carry
• European: GP gets little/no carry (didn't exceed hurdle)
• Big difference in LP economics

2. Fund Has Early Big Win, Later Losses:

• American: GP got carry on early win, keeps it despite later losses
• European: Later losses reduce whole-fund profit, may eliminate carry
• Distribution timing completely different

3. Multi-Vintage Portfolio Planning:

• Mix of American and European funds
• Need accurate cashflow timing for liquidity planning
• Wrong waterfall = wrong reserve needs

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Low Impact Scenarios:

Fund returns 3.0x+ TVPI:

• Both waterfalls result in similar carry (fund is highly profitable)
• Timing differs but total economics similar

Fund returns < 1.0x TVPI:

• Neither waterfall produces carry (fund lost money)
• No difference

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Summary

American Waterfall:

• Carry on each deal individually
• GP gets paid throughout fund life
• Earlier distributions to GP
• More common in US

European Waterfall:

• Carry on whole fund after capital returned
• GP waits for fund-level profitability
• Later distributions to GP (more to LPs early)
• More common in UK/EU

Impact:

• Distribution timing: 2-3 years difference
• LP economics: £2-8M difference per fund
• Liquidity forecasting: Critical to get right

Nagare handles both:

• Configure waterfall type per fund
• Automatic carry calculations
• Accurate projections for US, UK, EU structures

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How to Configure in Nagare

When creating a fund:

// American waterfall example
{
  name: 'US Growth Fund III',
  waterfallType: 'AMERICAN',
  carriedInterest: 0.20,
  preferredReturn: 0.08,
  catchUp: 1.0  // 100% catch-up
}

// European waterfall example
{
  name: 'UK Buyout Fund II',
  waterfallType: 'EUROPEAN',
  carriedInterest: 0.20,
  preferredReturn: 0.08,
  wholeFundHurdle: true
}

Portfolio Companion can also help:

You ask: "Create European Buyout Fund II with 20% carry and whole fund waterfall"

AI creates: Fund with correct waterfall configuration

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Portfolio-Level Impact

Example portfolio:

• 10 US funds (American waterfall)
• 3 UK funds (European waterfall)
• 2 EU funds (European waterfall)

If you model ALL as American:

• European funds show carry distributions 3-5 years too early
• LP distributions understated by 15-20% in early years
• Portfolio liquidity forecast is wrong

If you model correctly:

• Each fund uses appropriate waterfall
• Cashflow timing is accurate
• Liquidity planning is reliable

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Related Structures

Beyond American/European, other variations exist:

Asian Structures:

• Often hybrid (deal-by-deal with clawback)
• Region-specific hurdle calculations
• May have different carry splits by vintage year

Secondary Structures:

• May have modified waterfall (secondary pricing)
• GP may have agreed to lower carry
• Clawback provisions more common

Fund-of-Funds:

• Layered carry (underlying fund + FoF)
• Complex calculations (carry on carry)
• Need to model both layers

Nagare roadmap: Support for these variants in future releases.

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When to Care About This

You should model waterfall accurately if:

• You have UK/EU funds (must use European)
• You're doing liquidity planning (timing matters)
• You're comparing fund performance (carry affects net returns to LP)
• You have 5+ funds (small errors compound)

You can approximate if:

• All your funds are American (just use one model)
• You're doing rough scenarios (not detailed cashflows)
• You don't have UK/EU exposure

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Summary: Get the Waterfall Right

Wrong waterfall model:

• Distribution timing off by 2-3 years
• Carry calculations off by millions
• Liquidity forecast unreliable

Correct waterfall model:

• Accurate cashflow timing
• Correct LP vs GP economics
• Reliable liquidity planning

Nagare handles both:

• American (deal-by-deal)
• European (whole fund)
• Automatic carry calculations
• No manual waterfall math needed

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Related Reading:

• Liquidity Planning: Settlement Overlays
• How to Model Fund Cashflows
• Market Data Platform