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In these cases , it ’ s the simple matter of reaching out to ask the GP , because having that conversation is a better use of your time than trying to figure out all of these discrepancies on your own . The GPs are very open to these questions and won ’ t be offended if you have a query about the calculation , because quite frankly , they are happy that you are interested enough in the fund or in the management team to ask . There are so many nuances that go into this , and there are two standard methods of doing the waterfall , but every single one can have a variation that can only become clear after you ’ ve dug through the partnership agreement and understand all the nuances .
Could you explain how the European and American waterfalls differ ? Ultimately , the good news about the two major versions is that at the end of the day it should get you to the same result , the difference is the timing of when the carry will be paid . The European waterfall calculates the threshold hurdle on a whole fund basis . So each distribution reflects the aggregate performance of the fund rather than the individual investment and this is typically thought to be better for the investor . The American waterfall , we call a deal-by-deal waterfall , is primarily used in North America and calculates the hurdle threshold on each deal instead of the fund as a whole , so it ’ s making a distribution to the GP faster . Because you can have a deal in the portfolio that does extremely well early in the life of a fund and they are going to distribute carry based on whether that deal has done well . We feel that approach is much better for GPs especially for emerging managers , who can get carry earlier in the life of a fund rather than waiting for the fund to get to the threshold later in the cycle .
Do you - PEF - engage with both the GPs and the LPs on this process ? We spend much more of our time on the GP side as they hire us , but I ’ ve been on calls with LPs with my GP client to get them comfortable with the waterfall and answer questions on it . It ’ s not just the LP that needs additional assistance , sometimes the GP needs to be educated on how the waterfall works . We spend a lot of time at PEF walking the GP through the waterfall process and enabling them to understand the process in order to answer the LP questions .
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