Catch-Up
Catch-up is a waterfall provision that increases distributions to the GP after the preferred return until the agreed profit split is reached.
Definition
Catch-up provisions define how profits are allocated after LPs receive return of capital and the preferred return. During catch-up, a larger share of distributions may go to the GP until the GP has “caught up” to the agreed carried interest split. Catch-up structures meaningfully affect the timing and magnitude of GP economics. Allocator Context Allocators evaluate catch-up because it can change the net outcome profile for LPs, particularly in scenarios with early realizations or moderate performance. Catch-up is not inherently negative, but institutional LPs want transparency and standardization, especially when comparing peer funds. Decision Authority Catch-up terms are typically reviewed by both investment and legal teams. Nonstandard or aggressive catch-up structures often trigger negotiation, side-letter requests, or additional internal approval. Why It Matters for Fundraising Managers should avoid vague explanations like “standard waterfall.” Clear examples of how cash flows move through the waterfall under different outcomes reduce negotiation cycles and speed up closes. Key Takeaways Controls how quickly GP reaches carry economics Changes LP net outcomes depending on scenario Often negotiated by sophisticated LPs Clear waterfall examples reduce diligence friction