EQUITY GUIDE
How a Catch-Up Waterfall Works
A catch-up tier allocates a higher share of cash to the sponsor after the investor preference so the sponsor reaches an agreed share of profit.
In this guideWhat the analysis measuresCalculation frameworkUnderwriting reviewHow to use the result
What the analysis measures
First pay the required preference and capital according to the agreement. The catch-up then changes the sharing ratio for a limited amount of cash.
Calculation framework
Calculate the sponsor distribution required to reach the target cumulative profit share. Do not apply the residual split before the catch-up is complete.
Underwriting review
Track cumulative profit, not total cash including returned capital, unless the agreement expressly uses another basis.
How to use the result
Verify the model with simple examples and reconcile every euro. Catch-up language varies, so the legal definition must control the spreadsheet.