Catch-Up
Catch-up is a waterfall mechanism that allocates a higher share of profits to the GP after the preferred return is met, until the agreed carry split is reached.
Allocator relevance: Primarily affects timing of economics—often accelerating GP payouts and changing early LP distribution profiles.
Expanded Definition
After LPs receive a preferred return (the hurdle), catch-up provisions shift subsequent distributions heavily toward the GP until the GP has “caught up” to the agreed carry percentage. Catch-up can be full (100% to GP for a period) or partial (a defined split), and the design can meaningfully affect early-year net outcomes.
Catch-up does not necessarily increase total carry percentage, but it changes the distribution trajectory—important for allocators managing liquidity expectations and evaluating alignment.
How It Works in Practice
Catch-up applies inside the fund’s distribution waterfall and is triggered only after the preferred return and return of capital conditions are met. Allocators often model multiple scenarios (base, upside, mild downside) to see how catch-up changes LP cash flows.
Decision Authority and Governance
Catch-up structures should be reviewed alongside clawback enforceability, valuation policy, and whether carry is paid deal-by-deal or fund-level. Governance matters most when early exits create carry distributions before full portfolio outcomes are known.
Common Misconceptions
- Catch-up increases total carry by definition.
- All catch-up provisions are equivalent.
- Catch-up is irrelevant if the fund performs well.
Key Takeaways
- Catch-up changes payout timing more than totals.
- Modeling the waterfall is essential to compare funds.
- Pair catch-up review with clawback protections.