waterfall distribution

Definition

The predetermined order in which cash flows are distributed among different classes of investors, with senior investors getting paid before junior ones. It's like a literal waterfall—money flows down until each tier is satisfied.

Example Usage

According to the waterfall distribution, the private equity sponsors won't see a dime until the preferred investors get their 8% return plus their principal back.

Origin

Private equity and structured finance terminology from 1980s-90s

Fun Fact

Waterfall structures can have multiple tiers with different hurdle rates, creating byzantine payment schemes that require spreadsheets to understand and lawyers to argue about.

Source: Private equity and structured finance terminology

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