Depending on the type of fund, there are many types of waterfalls. Your fund accounting partner should be conversant with the standard and unique features of waterfalls for each fund type. Real estate funds are expected to generate good long-term returns, according to LPs. In terms of fund accounting, the fund’s investors are basically fixed-cost debtors. Fund accounting will likely execute mid-stream waterfalls with a return cap. The majority of private equity waterfalls are more straightforward. Fund proceeds will be shared between the GP and the LPs at predetermined intervals throughout the fund’s life. Hedge fund waterfalls are typically quarterly. Hedge fund investors are looking for short-term gains. Fund accounting will disburse to investors net of carried interest, both investors and management profiting throughout the lifecycle.
Almost every waterfall will have its own set of exceptions and exclusions, as well as its own fund accounting process to follow. In many funds, the general partner will make a contribution of 1 to 2 percent of the total commitment, known as a co-investment. Fund accounting will distribute this amount to the GP when returning funds to investors, depending on the waterfall structure. The GP will keep track of how much money will be distributed to him before the waterfall. The proceeds calculated by fund accounting for distribution to investors are split between the GP and the LPs according to the waterfall.