Glossary · Fund economics

American (Deal-by-Deal) Waterfall

Also called: deal-by-deal waterfall · deal by deal carry · front-ended carry

An American (deal-by-deal) waterfall is a distribution waterfall that pays carried interest on each investment as it is realised, once LPs have recovered the capital for that deal and, depending on the fund agreement, related costs and realised losses.

Publisher: Altss LLCContent modified 2026-10-01

ALTSS-ECON-011

Under a deal-by-deal waterfall a successful exit can pay carry even though other investments in the fund are still unsold or have failed. The GP is paid earlier, but if later deals lose money the GP may end up with more than its share of the fund's total profit and must give the excess back through the clawback.

Formulas

Deal-level carry with a full catch-up, and the resulting clawback exposure

P_i = D_i − K_i; C_i = 0 if P_i ≤ H_i; C_i = P_i − H_i if H_i < P_i < H_i ÷ (1 − c); C_i = c × P_i if P_i ≥ H_i ÷ (1 − c); excess E = max(0, Σ C_i − c × max(0, Σ P_i))

D_i, K_i: proceeds and cost of realised deal i
P_i: profit on deal i, D_i − K_i
H_i: preferred return on deal i's cost over its holding period (the deal's hurdle)
c: carry rate
E: carry paid deal by deal in excess of the whole-fund amount: the clawback exposure

This is the version with no loss carry-forward and a 100% catch-up. A deal that does not clear its hurdle pays no carry. Between the hurdle and H_i ÷ (1 − c) the catch-up is still running, so the GP receives all profit above the hurdle, which is less than c × P_i; only from H_i ÷ (1 − c) does the GP hold c of the deal's whole profit. LP-protective deal-by-deal LPAs also require each realisation to return the cost of previously realised losses and write-downs and fees and expenses, which reduces E. The whole-fund term c × max(0, Σ P_i) assumes the fund as a whole has completed its catch-up.

Generalisation to a partial catch-up (GP share k of the catch-up tier, c < k ≤ 1)

C_i = 0 if P_i ≤ H_i; C_i = k × (P_i − H_i) if H_i < P_i < k × H_i ÷ (k − c); C_i = c × P_i if P_i ≥ k × H_i ÷ (k − c). Equivalently C_i = min(k × (P_i − H_i), c × P_i) once P_i > H_i

k: GP's share of each distribution in the catch-up tier; k = 1 is a full catch-up
P_i, H_i, c: deal profit, deal hurdle and carry rate, as in the formula above

With k = 1 this is the full catch-up rule above. The catch-up tranche on a deal is c × H_i ÷ (k − c), the same tranche as in a whole-fund waterfall, so the catch-up completes at P_i = k × H_i ÷ (k − c). Without a catch-up the GP receives c × (P_i − H_i) above the hurdle and never reaches c × P_i.

How it works

Each realisation runs its own small waterfall: return of the capital attributable to that investment, a preferred return on it, a catch-up, then the carry split. What counts as "attributable capital" is the point on which the drafting turns. The LP-protective versions of the limited partnership agreement (LPA) add the cost of all previously realised investments that lost money, the cost of written-down or written-off investments, and a share of management fees and fund expenses. Some also require the remaining portfolio's value to exceed its cost by a margin before carry is released. For waterfalls other than whole of fund, the Institutional Limited Partners Association (ILPA) recommends in its Principles 3.0 that distributions return all realised cost of the investment with continuous make-up of unrealised impairments and write-offs, and all fees and expenses to date rather than only a pro rata share, with unrealised investments valued at the lower of cost or market.

Why it creates clawback exposure

Losses that occur after a profitable exit cannot reduce carry already paid. The final whole-fund calculation then shows the GP over-distributed, and the GP clawback obliges it to repay. LPs usually require security: a carry escrow holding back part of each carry payment, guarantees from the individual carry recipients, and interim clawback tests rather than only a test at the end of the fund's life.

Where it is used and how the label varies

The "American" label reflects the structure's association with US managers. Deal-by-deal carry is still found in real estate, in deal-specific vehicles and in some smaller funds; terms vary by manager. The "American" label is used loosely: some managers apply it to any waterfall that can pay carry before the whole fund is repaid, others reserve it for the version with no loss carry-forward. ILPA published a deal-by-deal version of its Model LPA in July 2020 alongside the whole-of-fund version; in it, the proceeds of each investment are first apportioned among partners by their relative capital contributions to that investment.

What LPs check

Whether realised losses and write-downs are carried forward; whether fees and expenses are allocated to each deal; whether there is a portfolio value test before carry is released; escrow percentage and release conditions; whether guarantees are several (each recipient for its own share) or joint and several; whether clawback is net of taxes; and when the clawback is tested.

Worked examples

Illustrative carry paid early, then over-distributed ($ millions)

Three deals cost 40, 30 and 30. Deal 1 sells after three years for 100: its profit of 60 clears both its 8% compounded hurdle of 10.39 and the point at which a full catch-up completes, 12.99 (10.39 ÷ 0.80), so carry is 12. Deal 2 sells after four years for 45: its profit of 15 clears its hurdle of 10.81 and its catch-up point of 13.52, so carry is 3. Deal 3 is sold after five years for 5, a loss of 25, which pays no carry and is not offset against the earlier deals. Carry paid deal by deal: 15.0. On the fund's total profit of 50, 20% carry is 10.0. Excess, and clawback exposure: 5.0.

The same deals with loss carry-forward

Suppose the LPA requires each realisation to return the cost of investments already written down, and deal 3 had been written down to zero before deal 1 sold. Ignoring the preferred return for simplicity, deal 1's 100 must first return 40 (its own cost) and 30 (deal 3's cost), leaving 30 of profit and carry of 6.0. Deal 2 adds 3.0. When deal 3 is finally sold for 5, its cost has already been returned, so the 5 is profit and pays carry of 1.0. Total carry: 10.0, equal to the whole-fund amount, with nothing to claw back.

Examples are illustrative; figures are not market data.

Not the same as

European (Whole-Fund) Waterfall: A whole-fund waterfall pays carry only after all contributions and the preferred return across the fund are returned.
GP Clawback: The clawback is the repayment obligation that corrects over-distribution; the deal-by-deal waterfall is one of its main causes.

Common mistakes

Assuming a deal-by-deal waterfall pays the GP more carry over the fund's life. With a full true-up and an enforceable clawback, total carry can be the same; the difference is timing and collection risk.
Comparing deal-by-deal terms without checking whether losses and write-downs carry forward.
Treating an unsecured clawback as equivalent to a whole-fund waterfall.

Edge cases

A deal that is profitable but below its own hurdle pays no carry deal by deal, even though the whole fund clears its hurdle; the final true-up may then owe the GP carry.
A deal whose profit clears its own hurdle but not its catch-up point (the hurdle ÷ (1 − c)) pays only the profit above the hurdle: a deal costing 100, held one year with an 8% preferred return (hurdle 8) and sold for 109 pays carry of 1.0 under a full catch-up, not 20% × 9 = 1.8.
Partial realisations require the LPA to allocate cost between the sold and retained portion.

Questions

Does a deal-by-deal waterfall always need a clawback?

Yes in practice. Without one, the GP could keep carry from early winners even if the fund as a whole loses money.

Sources

ILPA Model Limited Partnership Agreement (Whole of Fund and Deal-by-Deal versions). Institutional Limited Partners Association, ILPA, Whole of Fund first released October 2019, updated July 2020; Deal-by-Deal version and term sheet released 22 July 2020. Status: Current (checked 2026-10-01). Deal-by-Deal version and term sheet (2020-07-22) — supports: Model deal-by-deal waterfall; proceeds of each investment first apportioned by relative capital contributions to that investment
ILPA Principles 3.0: Fostering Transparency, Governance and Alignment of Interests for General and Limited Partners. Institutional Limited Partners Association, ILPA, Third edition, released 27 June 2019. Status: Current edition (no 4.0 found as of 2026-10-01) (checked 2026-10-01). pp. 10–11 (Waterfall Structure; Clawback) — supports: For non-whole-of-fund waterfalls: return of all realised cost with make-up of impairments and write-offs, all fees and expenses to date, unrealised investments at the lower of cost or market; clawback security

6 terms

Concept record

Concept ID: ALTSS-ECON-011
Classification: Fund economics
Topics: Fund terms & economics
Version: 2.0.0
Last reviewed: 2026-10-01
Structured data: JSON