Distributions in a private equity deal flow through a contractual waterfall defined in the LP agreement. The standard structure has four tiers.
Tier 1: return of capital
Investors receive their original contributed capital back, dollar for dollar, before any other distribution.
Tier 2: preferred return
Investors receive their preferred return (commonly 8 percent compounded annually) on contributed capital.
Tier 3: sponsor catch-up (sometimes)
Some structures give the sponsor a catch-up after the pref so that on a fully successful deal the promote applies to the full profit pool. Independent private equity sponsor deals often omit this tier.
Tier 4: split above the pref
Remaining profits split 70 to 80 percent to investors, 20 to 30 percent to the sponsor as promote.
Distributions can occur during the hold (from refinancings or dividend recaps) or only at exit, depending on the deal structure.
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