Distribution waterfalls are ubiquitous in the private investment world. They determine participation in cash flows or profits that is not in proportion to invested capital such as the incentive element (aka “promote” or “carry”) of equity arrangements. While the basic concept remains the same across investment funds and portfolio companies, the implementation and details frequently vary widely. The resulting complexity may simply reflect the underlying business understanding, but sometimes also different drafting approaches. This Insight explores the nuances of three drafting alternatives with respect to the return of capital and the priority return in the context of a distribution waterfall of a portfolio company structured as a limited liability company (“LLC”). These nuances have the potential to shift economics between investor and management.
In its simplest form, a distribution waterfall looks like this: Read more
