• The distribution waterfall determines the order in which the profits from pooled investments are distributed to the investors in the pool.

  • It is often used in the context of hedge funds or private equity funds.
  • As a rule, the cascading distribution schedule consists of four levels: return of capital; preferred return; catch-up tranche; and bear interest.
  • There are two common types of waterfall structures: American, which favors the investment manager; and European, which is more favorable for investors.