What is a catch-up?
The catch-up is the tier of a distribution waterfall that sits between the preferred return and the final carry split. Once limited partners have been paid their hurdle, the catch-up lets the general partner take a large — often the entire — share of the next dollars of profit, until the GP has received its agreed carry percentage of all the profit distributed so far.
It exists because the hurdle (or preferred return) is paid entirely to LPs first. Without a catch-up, the GP would only ever earn carry on profit above the hurdle, not on the hurdle itself. The catch-up reconciles that: it makes the GP whole so that, looking at total profit, the split lands at the headline carry rate.
The mechanic is best understood as the GP momentarily flipping the split in its own favor to recover the carry it was "owed" on the preferred-return dollars.
How the catch-up works in the waterfall
A standard distribution sequence runs:
- Return of capital. LPs receive back their contributed capital.
- Preferred return. LPs receive the hurdle — commonly an 8% compounding return — entirely to themselves.
- Catch-up. The GP receives a heavy share — frequently 100%, sometimes 80% or 50% — of the next profits until the GP has earned its full carry percentage on the total profit distributed (including the preferred return).
- Carried-interest split. Everything beyond that splits at the standard rate, typically 80/20 in the LPs' favor.
A 100% catch-up means the GP takes all the profit in the catch-up tier until it reaches 20% of cumulative profit. A partial catch-up (say 80/20) slows that down, spreading the catch-up over more distributions and leaving more cash with LPs for longer.
Full versus partial catch-up — why it matters
The presence and speed of the catch-up is one of the most negotiated economic points in a fund. A full (100%) catch-up is GP-favorable: once the hurdle is cleared, the GP rapidly reaches its target carry. A partial catch-up or no catch-up at all is LP-favorable, leaving more profit with investors before the GP reaches its full share.
The distinction interacts with the hurdle type. With a hard hurdle, the GP only earns carry on profit above the hurdle and there is effectively no catch-up. With a soft hurdle plus a full catch-up, the GP earns carry on all profit once the hurdle is exceeded — economically the most common arrangement in buyout funds.