How exactly do you get paid in an AIF? The distribution of profits follows a specific hierarchy known as the Waterfall. It typically flows in four stages:
- Return of Capital: Investors get their initial investment back first.
- Preferred Return (Hurdle): Investors get their minimum guaranteed return (e.g., 8%).
- Catch-up: The manager gets their share of profits until they are caught up to their fee percentage.
- Carried Interest: Remaining profits are split between investors and the manager (e.g., 80/20).
This structure ensures that the investor’s interests are prioritized above the manager’s profit motive.
