Waterfall Structure
A waterfall structure defines how cash flow and sale proceeds are distributed across investors and sponsors after return of capital, preferred returns, catch-ups, and promote splits.
Why it matters
waterfall structure decides control, downside, upside, investor rights, and who gets paid when the deal performs or disappoints.
Formula
Distributions follow tiers: return of capital, preferred return, catch-up if used, then promote splits.Worked example
Investors receive capital back, then an 8% preferred return, then remaining profits split 70/30 until a 15% IRR, then 60/40 above that.
How investors read it
The structure is the deal. Before chasing headline returns, map who controls decisions, who writes more cheques, who gets paid first, and who is left holding the bag.
Common mistakes
- · Treating the metric as a verdict instead of a screen.
- · Using broker-package assumptions without checking the source documents.
- · Ignoring taxes, capex, vacancy, financing terms, and timing.
- · Letting an optimistic exit or refinance assumption rescue a deal that does not work today.
Use current local data and source documents. Realist should show assumptions and date-stamp market inputs because stale inputs create fake precision.