Catch-up is a provision in a fund's distribution waterfall that allows the general partner to receive an accelerated share of distributions after limited partners have received their preferred return. The catch-up enables the GP to "catch up" to their eventual carried interest percentage once the hurdle rate has been achieved.
How catch-up works
After LPs receive their initial capital back plus preferred return, distributions shift to a catch-up phase where a higher percentage (often 100%) goes to the GP until they've received their full carried interest allocation on the profits. For example, with 20% carry and 8% preferred return, once LPs receive their capital plus 8% return, the next distributions might go 100% to the GP until the GP has received 20% of total profits. After catch-up is complete, remaining distributions revert to the standard allocation (typically 80% to LPs, 20% to GP).
Catch-up variations
Some funds use partial catch-up provisions where the GP receives a high percentage (such as 80%) rather than 100% during the catch-up phase, meaning LPs continue to receive some distributions whilst the GP catches up. Properly implementing catch-up provisions requires sophisticated fund accounting systems that track each investor's capital account position and apply the correct distribution allocation at each waterfall tier.
