Equity Waterfall

The agreed sequence in which distributable cash flow is allocated among a deal's equity investors, typically returning capital and a preferred return before splitting upside with the sponsor.

A common structure: return of capital, then a preferred return (often 7–9%), then a catch-up to the sponsor, then a split of remaining profit (a "promote") that increases as returns clear higher hurdles.

Waterfalls get materially more complex in OpCo/LBO structures with PIK (payment-in-kind) toggles, where a sponsor can elect to accrue rather than pay a return in cash — modeling this correctly requires the waterfall and the capital stack to stay in sync as assumptions change.