Understanding the Waterfall Investment Model: A Comprehensive Guide

The waterfall investment model is an effective method used by fund managers to distribute profits to investors in a private equity fund or real estate investment. It is a structured distribution model that allocates returns according to a predetermined hierarchy of priorities.

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In this introductory guide, we will discuss the basics of the waterfall investment model and how it works.

What is the Waterfall Investment Model?

The waterfall investment model is a distribution method used in private equity and real estate investments. It is designed to allocate profits from the investment to investors based on a hierarchy of priorities.

The model is called a “waterfall” because the distribution of profits flows from one level to the next. The waterfall model is typically used in funds that are structured as limited partnerships, where the general partner manages the investment and the limited partners provide the capital.

How Does the Waterfall Investment Model Work?

The waterfall investment model is structured into several tiers, with each tier representing a different priority of payment. The tiers are typically ordered from highest to lowest priority, with the general partner receiving the first payment, followed by the limited partners.

The first tier, or “preferred return,” is paid to investors who have provided capital to the fund. This is a fixed rate of return that must be paid before any other distributions can be made.

The second tier, or “catch-up provision,” is used to compensate the general partner for any expenses incurred while managing the investment. This payment is made after the preferred return has been paid in full.

The third tier, or “carried interest,” is the profit that is distributed to the general partner for their management services. This payment is made after the catch-up provision has been paid in full.

Finally, any remaining profits are distributed to the limited partners. The amount each partner receives is based on their ownership percentage in the fund.

Advantages and Disadvantages of the Waterfall Investment Model

There are many advantages to the Waterfall investment model, and the advantages far outweigh the disadvantages. One advantage is that it aligns the interests of the general partner with those of the limited partners. The general partner receives a share of the profits only after the limited partners have received their preferred return and catch-up provision.

It is also an excellent way for an individual investor to invest in multiple opportunities that they might not otherwise have access to.

One disadvantage is the model can be inflexible, as the hierarchy of priorities is predetermined and cannot be changed or easily modified. However, if you partner with an experienced firm like Oasis, we structure our models in a mutually beneficial way so everyone benefits.


The waterfall investment model is an effective way of distributing profits to investors in private equity and real estate funds. It is designed to align the interests of the general partner and the limited partners, and to ensure that each party receives a fair share of the profits.

However, like with any other investment, investors should carefully consider the advantages and disadvantages of the waterfall investment model.

They should also seek the advice of a qualified financial professional, like those available at Oasis Realty Investment Group, to determine if the investment is appropriate for their individual goals and risk tolerance.

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