Structure of a Private Equity Waterfall

Hey, everyone! Today, I want to talk about the structure of a private equity waterfall.

Let’s start out by discussing management fees.

Management Fees

A fund manager can charge whatever they want, but the norm is 2%.

Many large funds charge 2% no matter what kind of work they put into managing the fund.

If you are new to this or have a small fund, I strongly discourage you from doing this.

Honestly, I wouldn’t charge a management fee at all on your first few funds.

You’re a young entrepreneur; you need to earn your status before you start charging management fees.


I typically put an 8% pref on my funds.

This tells the investor that the first 8% of the returns goes to them, not the fund manager.

This is an important term to know!

Catch up

After the pref, I usually make a 2% catch up.

This fee is the opposite of the pref, meaning it goes to the GP to catch them up a bit.

Carried Interest

Let’s say my fund makes more than 10% (after 8% goes to the LP and 2% goes to the GP).

Anything above that mark is split 80/20, meaning 80% is distributed to the investors and 20% goes to the fund manager.

This is called carried interest.

This is a hot topic right now because the wealthy make most of their money from carried interest in funds, and carried interest is taxed a lot less than regular income.

The percentages above are typical, so be aware that fund managers can pick whatever numbers they want.

Looking at the 80/20 split, you might be asking yourself…

“So how do fund managers make money if they only get 20% of the returns?”

Let’s say an investor has $5M in a $100M fund…

As a fund manager, you could make 4x more than the investor because he gets 80% of the returns on his $5M investment while you make 20% of the returns on $100M!

This is why everyone wants to start a fund!


And that’s a simple structure of a private equity waterfall!

Hopefully, you can consider these points and maximize your potential of getting investors and knowing what to do when you get great returns!

Visit Fund Launch to learn more about starting your own fund!

That’s it for today!


Bridger Pennington

Want to get direct guidance for your fund? Schedule a time with my Fund Advisors!

DISCLAIMER: This content is for educational and informational purposes only. It is not to be taken as tax, financial, or legal advice. You should always consult a legal professional before taking action. Furthermore, this is not a recommendation to buy or sell any security. The content is solely just the opinion of the author.

Leave a Reply