Distribution Mechanics

Distribution Mechanics define how proceeds from realizations are distributed among LPs and the GP. These mechanics include waterfall type (European vs American), preferred return structure, catch-up provisions, recycling rules, escrow/holdbacks, and how expenses are netted.

From an allocator perspective, distribution mechanics are not a technicality. They determine alignment: whether the GP gets paid only after LPs are made whole (plus pref), or whether the GP can extract carry earlier with later clawback risk.

How allocators define distribution risk drivers

Allocators evaluate distributions through:

• Waterfall structure: European vs American and implications for timing
• Preferred return + catch-up: how and when carry is triggered
• Clawback protection: escrow, netting, timing, enforcement realism
• Recycling rules: how much can be reinvested and for how long
• Expense netting: how fees/expenses reduce distributable proceeds
• Holdbacks/reserves: for taxes, indemnities, or future obligations
• Transparency: reporting clarity on how amounts were calculated

Allocator framing:
“Does the waterfall protect LP economics under real-world outcomes—or does it create early GP monetization with later clawback risk?”

Where distribution mechanics matter most

• funds with early realizations and long tail risk
• multi-asset strategies with uneven exit timing
• managers with aggressive recycling or extension behavior
• LPs sensitive to governance optics and interim GP payouts

How mechanics change outcomes

Strong mechanics:

• align GP pay with realized LP outcomes
• reduce clawback disputes and end-of-fund friction
• increase trust and re-up probability
• improve IC defensibility (clean alignment story)

Weak mechanics:

• create early GP monetization and later clawback complexity
• increase dispute risk at the worst time (fund end)
• reduce allocator trust even if headline returns look good
• create misalignment under stress scenarios

How allocators evaluate discipline

Conviction increases when:

• waterfall terms are clear and consistent across documents
• clawback protection is practical (escrow or strong enforceability)
• reporting shows how distributions map to realized performance
• recycling is bounded and aligned with strategy duration

What slows allocator decision-making

• vague catch-up language and opaque calculation methods
• weak clawback protections
• aggressive recycling with broad discretion
• inconsistent terms between LPA/PPM/side letters

Common misconceptions

• “Waterfall choice is preference” → it changes alignment materially.
• “Clawback solves everything” → clawback is only as enforceable as the structure.
• “Recycling is always good” → it can extend risk and delay cash to LPs.

Key allocator questions during diligence

• Is the waterfall European or American, and why?
• How does preferred return and catch-up work in practice?
• What clawback protections exist (escrow, netting, timing)?
• How much recycling is allowed and what are the limits?
• How transparent is distribution reporting and calculation support?