Introduction
Should a general partner be paid when a deal succeeds, or only when the fund does? A whole-of-fund waterfall, usually called the European model, takes the second view: no carried interest until limited partners have their contributions and preferred return back across the entire fund. A deal-by-deal waterfall, the American model, takes the first, paying carry as each winner is sold and relying on a clawback if later deals lose money. The labels describe habits more than borders: in Proskauer's June 2026 review of buyout fund terms, 64% of surveyed North American funds used a deal-by-deal waterfall, while 85% of European funds used a whole-fund structure and 12% a hybrid.
When every deal makes money, the two often pay similar totals. What differs is when the GP is paid and who bears the risk that an early payment proves too large, a risk that follows a fund interest into every secondary.
Whole-of-Fund vs Deal-by-Deal: What Each Waterfall Measures
Both structures use the same tiers (return of capital, preferred return, catch-up, 80/20 split), worked through in the core waterfall article. What changes is the unit of measurement: the whole fund's cumulative cash flows, or each realized investment on its own.
| Feature | Whole-of-fund (European) | Deal-by-deal (American) |
|---|---|---|
| Carry measured on | The whole fund, cumulatively | Each exited deal, plus any losses the LPA adds |
| First carry paid | After all contributions and the pref are returned | On the first exit that clears its own tiers |
| Losses on other deals | Reduce carry automatically | Count only if the LPA adds them |
| Main LP protection | The order of payment itself | Clawback, escrow, guarantees, interim tests |
| Buyout funds using it (Proskauer, 2026) | 85% in Europe; 36% in North America | 64% in North America |
What a deal-by-deal agreement adds to each deal's tiers matters as much as the early timing.
- Deal-by-Deal (American) Waterfall
A carried interest structure in which the general partner earns carry as each portfolio investment is realized, once LPs have recovered the capital and preferred return attributable to that deal plus any losses the fund agreement adds to it. Because early carry can exceed what the fund ultimately earns, it is paired with a GP clawback.
Where Each Structure Is Used
Bargaining power draws most of the map. The Institutional Limited Partners Association's (ILPA) Principles 3.0 call the all-contributions-plus-preferred-return-back-first model best practice, and European LPs have largely secured it. Deal-by-deal carry persists where managers can hold out for it, and where a young firm needs cash carry to pay a team long before its first fund is realized: ILPA presented its deal-by-deal Model LPA of July 2020 as added flexibility for GPs, in particular emerging managers. Real estate funds face the same choice for their promote, as the real estate fund economics article shows.
Timing and Losses: One Fund Under Both Waterfalls
Take a fund whose LPs contribute $100 million at the start, split equally between two deals, with an 8% compounding preferred return, a full catch-up, and 20% carry; fees and the GP commitment are left out. Deal A sells in year four for $100 million. Deal B, carried at cost until then, sells in year eight for $20 million. The fund's net multiple of 1.2x and IRR of about 4%, two of the measures used to read a fund track record, leave it below its hurdle.
An Early Winner and a Later Loser
Under deal-by-deal carry, Deal A runs through the tiers alone: LPs recover its $50 million cost plus about $18.02 million of deal-level pref (four years at 8%), the full catch-up pays the GP a quarter of that, $4.51 million, and 20% of the remaining $27.47 million adds $5.49 million. The GP holds exactly $10 million, 20% of the deal's profit.
| Date | Event | Whole-of-fund: GP carry | Deal-by-deal: GP carry |
|---|---|---|---|
| Year 4 | Deal A sold for $100m | $0; proceeds repay LP capital | $10m paid on a $50m profit |
| Year 8 | Deal B sold for $20m | $0; fund below its hurdle | $0 on Deal B |
| Fund end | Final reckoning | $0; LPs keep $120m | Entitled to $0; $10m clawback due |
The timing gap is the whole story until year eight. Had Deal B succeeded, the head start would simply have been carry earned early; here it is carry the fund never earned, and LPs hold $110 million against the $120 million a whole-of-fund structure would have given them.
How Losses on Other Deals Are Counted
A pure deal-by-deal waterfall looks only at the exited deal. The ILPA deal-by-deal Model LPA is a modified version whose first tier returns the capital used for:
- The exited deal, at full cost.
- Earlier exits, winners and losers alike.
- Write-downs, the amount held investments are marked below cost.
- Fund expenses, including the management fee.
ILPA's Principles add that held investments should count at the lower of cost or market, so write-downs delay carry and write-ups never accelerate it. Had Deal B already been marked at $20 million when Deal A sold, the first tier would have taken $80 million, the remaining $20 million would not have covered about $28.84 million of pref on that capital, and the GP would have received nothing in year four.
Where the Catch-Up Fits
The catch-up matters more under deal-by-deal carry, because one exit can complete it. An 80% catch-up takes a slower path but still ends at $10 million on Deal A's large profit. A hard hurdle, paying 20% only of profit above the pref, gives about $6.40 million, shrinking what may later be clawed back. Under a whole-of-fund waterfall the catch-up happens once, after the whole fund clears its hurdle, so it shapes the final split rather than early payments.
The Clawback and How It Is Secured
The clawback returns carry the final numbers show the GP never earned. Whole-of-fund funds have one too: ILPA's whole-of-fund model tests it a year after the commitment period ends, on GP removal, and at liquidation, since carry paid on contributions to date or through tax distributions can prove excessive. The deal-by-deal model tests from that first anniversary and, in bracketed text, every year after.
- GP Clawback (Giveback)
A fund agreement provision requiring the general partner to return carried interest received in excess of its entitled share of cumulative profits, or enough to restore LPs' contributions and preferred return, measured at liquidation and often at interim dates.
What LPs actually recover depends on how the promise is secured, when it is tested, and how it is capped.
Escrow, Holdbacks, and Guarantees
Both ILPA models place a bracketed 30% of carry distributions in an escrow account, held until the LP has received its commitment plus pref; in the example, $3 million of the $10 million. Practice is thinner where whole-fund waterfalls dominate: 60% of European funds in Proskauer's sample used no escrow. Behind escrow sit the people who received the carry. The models require each recipient to cover its pro rata share if the GP cannot, with joint and several liability in brackets, which the Principles strongly encourage. Carlyle's 2025 annual report shows the several version: each giveback is specific to its recipient, $151.5 million was withheld from professionals' carry as security, and realized givebacks since inception total $257.0 million. That uncertainty is one reason public investors value listed managers' carry below their fee income, as the FIG article on carried interest explains.
Interim Tests and the After-Tax Cap
An interim clawback runs the hypothetical liquidation early. The Principles want defined triggers, including set intervals, key person events, removal notices, and a NAV coverage test with a margin such as 125%.
The cap is where ILPA's principles and its models part ways. The Principles want clawbacks gross of taxes; the models, drafted by GP and LP counsel together, cap the payment at carry received less taxes paid or payable on it. If the example's GP had paid $2.5 million of tax, the clawback would be capped at $7.5 million, $3 million from escrow and $4.5 million from the GP or its guarantors, leaving LPs $117.5 million instead of $120 million.
Why the Waterfall Type Changes a Secondary
In an LP-led sale, the buyer steps into the seller's capital account and its history. Under deal-by-deal carry, some carry may already have left the fund, and the interest may hold a clawback claim and escrow balance worth less than face value; the purchase agreement should say whether they transfer, as transfer mechanics and the purchase agreement explains. The GP's incentives shift too: one facing a clawback on paper gains from a higher exit price, and Carlyle says it typically delays realizing carry when giveback risk looks unacceptably high.
Continuation vehicles make the split concrete. ILPA's 2023 guidance accepts that no carry crystallizes when a fund with a European waterfall is not yet in carry. Under deal-by-deal carry, selling an asset into a CV realizes that deal, so carry can become payable on the transfer price, after any losses the LPA makes that deal cover, while the rest of the fund is uncertain, which is why the guidance asks the GP to roll 100% of accrued carry in almost all cases and why CV economics treats the rollover as a core term.
Seen from the LP's side, deal-by-deal carry is an advance: LPs pay the GP its share of each winner before knowing what the fund will earn, and the clawback, escrow, and guarantees are the repayment terms. A whole-of-fund waterfall makes no advance at all. For an advisor pricing a fund interest or a CV, the label matters less than two numbers: how large the outstanding advance is, and how much of it is secured.
