“European” Style Waterfall Clause
(Private Equity Fund)

Summary

This waterfall distribution clause for private equity fund (PEF) limited partnership agreements addresses how capital is distributed from a PEF pursuant to the “European” style. Since PEF investors do not generally have the right to voluntarily withdraw capital, the waterfall provision addresses the key issues of (a) the priority and timing of the return of capital contributed by investors (as well as any associated profits thereon) and (b) the allocation of performance compensation (the “carried interest”) to the manager. In the European style waterfall, investors must receive 100% of their capital contributions plus a “preferred return” before the investment manager receives any performance compensation. (See the “American” Style Waterfall Clause (Private Equity Fund) for an alternative, which provides that each investment passes through the waterfall separately, creating the potential for performance compensation to be paid each time an investment is liquidated.) This clause includes practical guidance and drafting notes. This European style waterfall clause is drafted assuming that the PEF is a domestic limited partnership. Note that the legal form and jurisdiction of a PEF can vary, and accordingly, the terms related to PEF waterfall distributions can also take on several formulations. See Onshore/Offshore Structuring Issues for Private Equity Funds for a discussion of PEF structuring variations. For a full listing of related private equity and financial reporting content, see Private Equity Transactions Resource Kit and Financial Statements and Reporting Resource Kit. This clause should be read in conjunction with the practice notes Private Equity Fund Documents: Drafting and Review and Limited Partnership Agreement Drafting for a Private Equity Fund. This clause assumes that it will be included in a PEF limited partnership agreement. See Limited Partnership Agreement for a Private Equity Fund for an example.