What is a "catch-up" in an equity waterfall and when does it typically occur?

• A. A catch-up ensures investors receive all profits before the sponsor
• B. A catch-up is a temporary suspension of distributions
• C. A catch-up allows the sponsor to receive a larger share of profits after the preferred return is paid, often until a target split is achieved
• D. A catch-up is a reserve to fund future investments

Answer: (C)

Catch-up is a feature of equity waterfalls where after investors have received their preferred return (and return of capital), the sponsor gets a larger share of profits for a period to bring the overall economics up to the agreed carried interest. The idea is to “catch up” the sponsor to the target split so that, once the catch-up is complete, the remaining profits follow the usual LP/GP split (for example, 80/20). In practice, this means after the preferred return is paid, distributions flow predominantly to the sponsor (often 100% to the sponsor) until the sponsor has earned the target amount of profits, and then the remaining profits are split according to the negotiated ratio. This isn’t about paying all profits to investors first, nor is it a temporary suspension or a reserve for future investments.