European-Style Waterfall

A common method for distributing investment cash flow between two or more partners. A European-Style waterfall refers to a form of equity waterfall where no promote (i.e. carried interest) is paid to the sponsor (i.e. general partner) until the limited partner has received a full return of capital and earned a preferred return. As such, distributable cash flow during operations and distributable cash flow at a capital event are largely treated the same.

While referred to as European-style, this form of real estate partnership waterfall is common worldwide including in the United States. It is often preferred by limited partners as it reduces the probability that promote distributions made to the GP must be clawed back at a later date due. It is most common to partnerships with institutional partners.

A European-Style Equity Waterfall compared to an American-Style Equity Waterfall