Fund accounting and waterfalls, visualised

The distribution waterfall is an order of operations

A waterfall is often drawn as a picture of money falling into buckets, which is accurate about the sequence and misleading about the certainty. There is no standard waterfall. The tiers, the basis on which the preferred return is calculated, whether a catch up exists at all and how the profit split is expressed are all terms of a specific fund's limited partnership agreement.

What generalises is the shape: proceeds move through tiers in a defined order, and each tier is satisfied in full before the next receives anything. The two structures most commonly described are deal by deal, where the calculation runs per realisation, and whole of fund, where it runs across the fund as a whole. The difference determines when the general partner participates, and it is the term LPs read most carefully.

We do not publish indicative rates or splits on this page, because a figure quoted out of the context of an agreement is worse than no figure. Read the distribution article of the agreement itself, and model it against your own realisation profile.

What moves a capital account from one period to the next

The capital account is the per-investor ledger. It is where a fund's aggregate performance becomes an individual investor's balance, and it is the number an LP checks first.

Six components move it: the opening balance, contributions drawn in the period, the investor's allocated share of gains and losses, fees and expenses charged, distributions paid, and the resulting closing balance. Every one of those needs to reconcile to something. An unexplained movement in a capital account is the single fastest way to lose an LP's confidence in the rest of the report.

How a valuation reaches an LP statement

Between a portfolio company's performance and a number on an LP statement sits a chain of six steps: evidence, methodology, review, approval, accounting entry and report. Each link should be traceable in both directions.

In practice this chain is where most operational pain lives, because the links usually sit in different places. Evidence arrives by email, the methodology lives in a model, the review happens in a meeting, the approval is a note, the accounting entry is in an administrator's system and the report is a document. Reconstructing the chain months later, for an audit or an LP question, is the work nobody budgets for.

Holding the chain on one platform is the reason Reuben AI exists. The point is not a prettier report. It is that the report can be defended without reassembling six systems.

What "audit ready" actually means

Audit ready is not a state a dashboard confers. It means that for each reported figure, the supporting evidence exists, its version is identifiable, the approval is documented, and a person can be named. That standard is unchanged by the software used to prepare the report.

What good software changes is how long it takes to demonstrate. If the evidence, the approval and the entry are already linked, an audit request is a query rather than a search.

Common questions

What is a distribution waterfall in a private fund?

It is the order in which realisation proceeds are shared between limited partners and the general partner. Proceeds pass through tiers, typically return of capital, a preferred return, a catch up where one exists, and a profit split. The tiers, rates and basis are set in the fund's limited partnership agreement and vary between funds, so there is no single correct set of numbers.

What is the difference between a European and an American waterfall?

The labels describe when the general partner participates. A whole of fund waterfall, often called European, runs the calculation across the fund, so limited partners generally receive their capital and preferred return across the fund before the general partner shares in profit. A deal by deal waterfall, often called American, runs per realisation, so the general partner can participate earlier. Actual behaviour depends on the specific agreement, including any clawback.

What is a capital account roll-forward?

It is the statement showing how an investor's balance moved over a period: opening balance, contributions, allocated gains and losses, fees and expenses, distributions, closing balance. It is the bridge between fund level performance and what a single limited partner sees.

How does a valuation end up on an LP statement?

Through six steps: evidence with a date, a methodology chosen for the asset, review, an approval that sets the valuation of record, an accounting entry allocated across capital accounts, and the report itself. Each step should be traceable back to the one before it.

Does Reuben AI replace a fund administrator?

No. Reuben AI is the operating layer across sourcing, diligence, valuation evidence, portfolio monitoring and LP reporting. Many firms keep their administrator and use Reuben AI so the evidence and approval chain behind each figure lives in one place.