The Equity Waterfall, Explained (GP/LP Splits)
Equity waterfall explained — how distributions flow through return of capital, preferred return, and an 80/20 promote split between LP and GP, step by step.
By Michael Laudino, LFO Capital LLC · Published 2026-06-17
An equity waterfall is the ordered set of rules for splitting a deal's cash between the LP and the GP — cash fills one tier completely before any spills to the next. A standard structure returns LP capital first, pays a preferred return second, then splits the remainder on a promote. Walk $6,000,000 of distributable cash through an 8% pref and an 80/20 promote and the LP ends with $5,880,000 (1.176x) while the GP earns a $120,000 promote.
Tier 1 — return of capital. The LP gets its invested money back before anyone profits. On $5,000,000 of LP capital, the first $5,000,000 of distributions goes straight back to the LP, leaving $1,000,000.
Tier 2 — preferred return. The LP earns a preferred return on its capital before the GP shares in profit. An 8% pref on $5,000,000 is $400,000, paid out of the remaining $1,000,000 and leaving $600,000.
Tier 3 — the promote split. Only now does the GP participate. The residual $600,000 splits 80/20 in the LP's favor: $480,000 to the LP and $120,000 to the GP. That 20% GP share is the promote — the performance incentive a sponsor earns for clearing the hurdle, often on capital it didn't contribute.
Add it up and the LP collects $5,000,000 + $400,000 + $480,000 = $5,880,000, a 1.176x multiple; the GP collects a $120,000 promote. The tier order is what protects the LP — capital and pref are satisfied before the sponsor earns its upside. For the mechanics of the promote tier itself, see the waterfall promote glossary entry.
Worked example — $6,000,000 through an 8% pref, 80/20
| Line | Amount |
|---|---|
| Distributable cash | $6,000,000 |
| Tier 1 — return of LP capital | $5,000,000 → $1,000,000 left |
| Tier 2 — 8% pref (8% × $5,000,000) | $400,000 → $600,000 left |
| Tier 3 — 80/20 split of $600,000 | LP $480,000 / GP $120,000 |
| LP total ($5,000,000 + $400,000 + $480,000) | $5,880,000 (1.176x) |
| GP promote | $120,000 |
The discipline: each tier is filled before the next pays — LP capital and pref clear before the GP earns a dollar of promote.
Frequently asked questions
What is an equity waterfall?
An equity waterfall is the ordered set of rules that decides how a deal's cash distributions are split between limited partners (LPs) and the general partner (GP). Cash flows through tiers — typically return of capital, then a preferred return, then a promote split — with each tier filled before the next receives anything.
What is a typical waterfall structure?
A common single-tier structure returns LP capital first, pays an 8% preferred return next, then splits the remaining profit 80/20 in the LP's favor. The 20% to the GP is the promote — its incentive for performance above the pref.
How is the LP's total return calculated in a waterfall?
Add what the LP receives across every tier: its returned capital, its preferred return, and its share of the residual split. Divide that total by the capital it invested to get the equity multiple. The GP's promote comes only from the residual tier above the pref.
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