How to Track Preferred Return and Waterfall on a PE Deal

A PE waterfall tracker is hurdle, catch-up, and carried interest as fields on the commitment, then each distribution notice mapped onto those tiers. It is not a private-equity textbook, and it is not a slogan called 2 and 20. Raziel’s benefits of private equity page is the thesis. Raziel’s PE distribution tracking page is the cash-in date and the recallable flag. This page is the waterfall ledger: what the LPA actually pays you on this wire.

This is not legal, tax, or investment advice. Raziel Holdings, Inc. does not provide it. Copy the signed LPA, not a market default.

Put hurdle, catch-up, and carry on the commitment first

ILPA Principles 3.0 (June 2019) defines a waterfall as the order of distributions to limited partners and the general partner. Best practice is all contributions plus preferred return back first (a whole-of-fund waterfall) before the GP accrues carried interest. ILPA published two Model LPAs: whole of fund (fall 2019, updated July 2020) and deal by deal (July 2020). That type is a field. Write it on day one, with the LPA section you will cite when a notice arrives. Preferably the GP also sends a model for how fees, expenses, and carried interest will be calculated. Attach it. Do not invent a 20 percent haircut.

Write, on day one:

• Waterfall type. Whole of fund or deal by deal, plus the LPA section that runs it.

• Preferred return (hurdle). Rate, compounding, day count, and the start date the LPA uses (call date vs. the date a subscription line was drawn).

• Hard hurdle or not. Principles 3.0: carry should ideally be based only on profits that exceed the LPs’ preferred return.

• Catch-up. Whether it exists, and the split until the GP has caught up to the agreed carry percentage of profits.

• Carry split after catch-up. The ongoing LP/GP split once catch-up is done.

• Escrow, if any. Principles 3.0 example for non-whole-of-fund models: 30 percent of carry distributions or more.

Raziel’s VC and private equity portfolio management page is the firm-level dashboard. These fields sit on one LP commitment.

Preferred return is a running balance, not a headline rate

The ILPA Model LPA (whole of fund) fills preferred return as a bracketed 8 percent annual rate, compounded annually and calculated daily on capital contributions, from the date the fund receives each contribution until distribution (or deemed distribution). That 8 percent is a template fill-in. Your rate is the one in the LPA you signed. The July 2020 whole-of-fund update: preferred return continues to accrue until all contributed capital is returned, and unpaid preferred return is paid, to the limited partners. If the fund uses a subscription line, the Model LPA and Principles 3.0 calculate preferred return from the date the line was drawn, not the later call date.

Catch-up and carried interest are the next two fields

ILPA’s Model LPA overview includes a GP catchup and preferred return. The whole-of-fund term sheet then drafts four steps after proceeds are apportioned:

• First. 100 percent to the partner until cumulative distributions equal aggregate capital contributions.

• Second. 100 percent to the partner until that amount equals the preferred return.

• Third (catch-up). 80 percent to the GP and 20 percent to the partner until the GP has received 20 percent of those profits (the Model LPA’s bracketed split).

• Fourth. Thereafter, 20 percent to the GP and 80 percent to the partner.

The deal-by-deal Model LPA keeps the same preferred-return, catch-up, and 20/80 tail. Its first step returns cost of this investment, realized investments, unrealized losses, and fund expenses (including the management fee), not all contributions. Copy that first step from your LPA.

Principles 3.0 on carry itself: calculate it on net profits, not gross, factoring in fund-level expenses, and take no carry on current-income distributions. Those are booking rules, not a second IRR. Raziel’s IRR calculator is dated cash-flow math. Feed it the net cash after the waterfall, one vehicle at a time.

Map each distribution notice onto the tiers you already stored

The sibling distribution-tracking page is the wire: settlement date, recallable or not, net amount. This row is which waterfall step those dollars hit. ILPA’s 2011 Capital Call and Distribution Notice Best Practices: Dist: Carry is the GP’s share of proceeds, as defined by the waterfall calculation in the LPA (an offset to the distribution). Dist: Clawback is a return of excess carry. With each distribution, the GP should disclose the exact amount of carry taken and provide a build-up to the carry calculation. Copy the LPA section the notice cites. If the notice is silent, store the net amount and a note that the build-up was missing. Do not back into catch-up from a 20 percent rule of thumb.

ILPA’s September 2025 template guidance treats the template as a supplement to the GP notice, not a substitute, with optional waterfall/carry and clawback calculations. First delivery is not required until Q1 2027. Keep the PDF. On each notice, write the LPA section cited, the components printed (return of capital, gain, income), carry taken, and the tier hit: still returning capital, still filling preferred return, in catch-up, or in the post-catch-up split.

Whole of fund and deal by deal do not share a running total

Under a whole-of-fund LPA, carry waits until aggregate capital contributions, then preferred return, then catch-up. Under a deal-by-deal LPA, an early winner can start catch-up while other investments are still unrealized. For deal-by-deal, Principles 3.0 wants unrealized investments valued at the lower of cost or market, and accrued carry held in escrow. Apply a whole-of-fund clock to a deal-by-deal fund and you will either withhold carry the LPA already paid or miss catch-up the LPA already ran. Store the type. Then post each notice against that type.

A workbook holds this if the fields hold: hurdle, catch-up, and carry split on the commitment, each notice tagged to a tier. 2 and 20 is not a substitute. Raziel’s alternative-asset dashboard is the book those dated calls and distributions already sit on: IRR, MOIC, capital calls, documents, and AI ingest of the notice PDF. Raziel does not interpret your LPA. When the first distribution lands, open the waterfall fields you should have written at close, and map the notice onto them.