Explain the distribution waterfall.
A core Private Equity interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
Tier 1: Return of Capital — 100% to LPs until they get their money back. Tier 2: Preferred Return — 100% to LPs until they've earned 8% annualized. Tier 3: Catch-Up — 100% (or 80%) to GP until GP's share equals 20% of total profits. Tier 4: Carried Interest — 80/20 split (LP/GP) on remaining profits. This structure ensures LPs get paid first.
WHAT INTERVIEWERS LISTEN FOR
- ✓Return of capital to LPs
- ✓Preferred return (8%)
- ✓GP catch-up provision
- ✓Carried interest split (80/20)
- ✓LP priority in distributions
COMMON MISTAKES
- ✗Confusing GP and LP roles
- ✗Omitting catch-up tier
- ✗Misstating preferred return rate
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