Look for return of capital, pref, catch-up, hurdles, promote splits, refinance treatment, and clawback language.
Plain-English term
Waterfall
The order in which deal profits are distributed.
Definition that survives review
A waterfall lays out who gets paid, in what order, and at what return hurdles as deal cash flow and sale proceeds are distributed. In a real review, translate the term into the cash flow, priority, deadline, tax treatment, status test, or control right it changes.
Use it to see who gets paid first and when the sponsor earns promoted economics. If you cannot point to the exact document or calculation behind it, you have recognized the vocabulary but not yet understood the deal.
Why it matters
The waterfall is where alignment either exists or performs in a nice outfit. Read it before you clap for the headline split. This is why the term is not finished until you know who calculated it, what period it covers, and what happens if the friendlier definition is wrong.
A useful glossary entry should show where the word appears, what input changes it, and which connected term changes the answer next: Preferred return, IRR, Capital stack.
How to use it in diligence
Cash flows through tiers: return of capital, preferred return, catch-up if any, then split profits.
A waterfall may pay investors first, then let the sponsor earn a promote after a hurdle. The exact tier language matters more than the sales summary.
A 70/30 split headline means almost nothing until you know when it starts and what sits before it.
Proof checklist
- The source period, calculation basis, and owner of the number are named.
- The term reconciles to the PPM, operating agreement, lender documents, tax schedule, underwriting model, or verification record.
- The downside version is visible before the optimistic version gets trusted.
Example, trap, question
A waterfall may pay investors first, then let the sponsor earn a promote after a hurdle. The exact tier language matters more than the sales summary.
A 70/30 split headline means almost nothing until you know when it starts and what sits before it.
- when the sponsor promotes, whether there is catch-up, and what happens after refinance or sale.
- What source document, schedule, or third-party evidence proves this term in this specific deal?
- Which connected term changes the answer next: Preferred return, IRR, Capital stack?
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