Capital Calls, Distributions & the Waterfall

Committed, called, uncalled

When an LP "invests $10M in a fund," they've made a commitment: a legal promise to provide up to $10M when asked. Almost none of it moves on day one.

A fund calls capital in instalments over its first several years, as it makes new investments, funds follow-ons and pays fees. Drawing money only when it's needed suits the LP, whose money stays invested elsewhere until then. It also suits the fund's IRR, which starts counting when capital is called, not when it's committed.

How a capital call works

1. The GP decides the fund needs cash: a new investment is closing, a follow-on is due, or a management fee payment is coming up.
2. The fund, usually through its administrator, issues a capital call notice to every LP. Each LP's share is pro rata to its commitment. An LP with 5% of commitments funds 5% of every call.
3. The notice states the amount, the due date, wire instructions, and what the money is for: investments, fees, or fund expenses.
4. LPs wire. The administrator reconciles receipts against each LP's capital account.

The notice period is set in the LPA; around ten business days is common. The LPA also sets out what happens when an LP fails to fund. Default remedies can include interest, loss of future distributions, or a forced sale of the defaulting LP's interest. Defaults are rare, and the penalties are severe on purpose: one missing LP can blow up a closing.

Many funds also use a subscription credit line, a short-term bank loan secured by LPs' uncalled commitments, to close deals before calling capital. It smooths operations. It also flatters IRR, which is why LPs increasingly ask to see performance with and without the line (module 7.3).

Capital accounts

Every LP has a capital account: a running ledger of its contributions, its share of the fund's income, gains and losses (realised and unrealised), the fees and expenses allocated to it, and its distributions. It's the most important record the back office keeps. Quarterly statements, tax slips and the waterfall all read from it.

Tax flows through to the LPs. In the US, each LP receives a Schedule K-1 every year; Canadian partnerships issue T5013 slips. Late tax slips are one of the most common LP complaints about a fund's operations.

Distributions

When a portfolio company is acquired or goes public, the fund receives proceeds and distributes them. Usually that's cash. Sometimes it's in kind: shares of a newly public company handed straight to LPs, who decide for themselves when to sell. Either way, the waterfall decides how each distribution is split between the LPs and the GP.

The waterfall

A waterfall is an ordered list of who gets paid. Money fills each tier before spilling into the next. A typical venture waterfall has up to four tiers:

1. Return of capital. LPs get back everything they've paid in, including the capital that went to fees and expenses.
2. Preferred return, if any. LPs receive a hurdle, often 8% a year, on that capital. Many venture funds have no hurdle; it's more common in private equity.
3. GP catch-up, if there's a hurdle. The GP receives most or all of the next dollars until it has caught up to its full carry percentage of the profits distributed so far.
4. Carried interest split. Everything after that is split, typically 80% to LPs and 20% to the GP.

European vs. American

• European (whole-fund). LPs get back all paid-in capital across the whole fund before the GP earns any carry. This is standard in venture, and it's the structure LPs prefer. In a 2026 review of fund terms, Cooley found roughly 90% of the funds it looked at used a European waterfall.
• American (deal-by-deal). Carry is calculated exit by exit. The GP can be paid on an early winner before losses elsewhere in the fund have been accounted for.

Clawback

If the GP receives carry early (on a deal-by-deal waterfall, or on interim distributions under a whole-fund one) and later losses mean it was overpaid, a clawback requires the GP to return the excess. A clawback is only as good as the GP's ability to pay, which is why some LPAs require carry to be held in escrow or guaranteed by the individual partners.

▸Worked example — the same fund, with and without a hurdle

Setup: a fund with $100M paid in, a whole-fund waterfall and 20% carry. Over its life it distributes $180M, so profit is $80M.

No hurdle:

Tier	LPs	GP
Return of capital	$100M	—
80/20 split of the remaining $80M	$64M	$16M
Total	$164M	$16M

8% hurdle with a full catch-up. Assume the preferred return owed, given when capital went in and came out, works out to $30M.

Tier	LPs	GP
Return of capital	$100M	—
Preferred return	$30M	—
GP catch-up (100% to the GP until it holds 20% of profits distributed so far)	—	$7.5M
80/20 split of the remaining $42.5M	$34M	$8.5M
Total	$164M	$16M

The totals are identical. With a full catch-up, a hurdle changes when the GP gets paid, not how much, as long as the fund clears the hurdle. It only bites when returns are close to it, which is why LPs scrutinise hurdle and catch-up terms hardest in funds that might end up middling.

Fees, expenses and who pays for what

• Management fee. Pays the management company: salaries, rent, travel. It's called from LPs like any other capital (module 1.2 covers the economics).
• Fund expenses. Charged to the fund itself: the audit, fund administration, legal costs on deals, tax preparation. The LPA lists what qualifies.
• Organisational expenses. The legal cost of forming the fund. Usually capped in the LPA, with anything above the cap borne by the GP.

The line between a fund expense and the manager's own cost is a recurring source of LP scrutiny. Making it visible is a large part of what the ILPA Reporting Template was built for (module 7.3).

Who actually does this work

At a small fund, a part-time CFO and an outsourced fund administrator. The administrator keeps the books, issues call and distribution notices, maintains capital accounts and prepares statements. An independent audit tests all of it each year. Larger firms add a controller and fund accountants alongside the administrator. Either way, the GP keeps the decisions — when to call, what to distribute, how to value — even when the administrator does the arithmetic.

What this means for you

If you're in or heading for a fund ops seat, this is the core of the job. Every number an LP sees flows from capital accounts you're responsible for, and interviews for fund accounting and CFO roles routinely ask candidates to walk through a waterfall.

On the investing side, two things. Know how much uncalled capital and reserves your fund has before you promise a founder a follow-on. And remember that carry doesn't exist until the waterfall says it does: a fund at 2.5x on paper has paid its partners nothing.

Module 6.2 covers the number behind most of those paper returns: the valuation marks.