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CFA Level I · CFA Level I Exam · Alternative Investment Features, Methods, and Structures

A private equity fund uses a European (whole-of-fund) waterfall with a 100% return of contributed capital before carried interest. Compared with an American (deal-by-deal) waterfall, the European waterfall is most likely to:

A European waterfall most likely delays carried interest to the general partner and better protects limited partners. Because contributed capital and the preferred return across the whole fund must be returned first, carry is paid later than under a deal-by-deal approach.

  1. Adelay carried interest payments to the general partner and better protect limited partnersCorrect
  2. Baccelerate carried interest payments to the general partner after the first profitable exit
  3. Celiminate the need for a clawback provision entirely

Explanation

A European waterfall requires limited partners to receive all contributed capital (and usually the preferred return) before the general partner receives carry, so carry is paid later and LP risk falls. The American waterfall allows earlier carry after individual deals. A clawback is less likely to be needed but is not eliminated entirely.

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