Limited partners
What should an LP clarify about the distribution waterfall of a venture fund of funds?
a venture fund of funds: A distribution waterfall defines how proceeds are allocated under the specific agreement.
A distribution waterfall defines how proceeds are allocated under the specific agreement. Carry percentages are incomplete without the base, return-of-capital rules, timing, deductions, and any other conditions. Deal-level and fund-level arrangements may behave differently.
Start with the decision
Ask a qualified adviser to map the governing provisions to a worked example. Label every simplifying assumption. Include a low or zero-profit case, and ask how prior distributions, losses, escrow, or clawback provisions affect actual payments.
The illustrative scenario
This is an educational workbook. The company or fund and all numerical inputs below are fictional. They are not ADIN results, customer claims, market benchmarks, or a forecast.
The fictional vehicle commits capital to several underlying venture funds. Its LP receives exposure through another layer of manager selection, reporting, fees, and cash flows. Several underlying funds may invest in the same companies.
A count of fund commitments is not a count of independent company exposures. Separate the vehicle's economics from the economics, liquidity, and concentration of underlying holdings.
A deliberately simplified one-period waterfall
Assume a fictional one-period arrangement with $81,000,000.00 of proceeds. For this exercise only, return $45,000,000.00 of capital, deduct $900,000.00 of expenses, then apply an invented 20% carry share to the remaining $35,100,000.00. The carry calculation is $7,020,000.00. Proceeds after the modeled expenses and carry are $73,080,000.00.
The 1.8-times proceeds assumption is not a return target or forecast, and the 20% rate is not a statement of any particular fund's terms. This simplified model has no preferred return, catch-up, recycling, prior distributions, escrow, clawback, or other provisions. A real waterfall can require substantially different calculations and qualified document review.
Compare total exposure and costs across both layers. Keep the vehicle's distributions distinct from paper values reported by underlying managers. Replace the proceeds with a case that has no eligible profit and observe that the modeled carry is zero. Keep the possibility of losses and delayed or absent distributions visible. The lesson is to define the base and sequence before comparing percentages, not to infer an expected payment from a promising portfolio.
| Item | Illustration |
|---|---|
| Fictional proceeds available | $81,000,000.00 |
| Assumed capital returned first | $45,000,000.00 |
| Assumed expense deduction | $900,000.00 |
| Remaining eligible profit in this model | $35,100,000.00 |
| Invented 20% share of that profit | $7,020,000.00 |
| Proceeds after expenses and carry | $73,080,000.00 |
| Carry when eligible profit is zero | $0.00 |
Use this worksheet
Answer the questions with a source, date, owner, and next action. Mark an unknown as unknown. Use public or permissioned information and involve a qualified specialist when a question requires expertise beyond the team’s competence.
- What proceeds are eligible?
- What is returned first?
- What deductions apply?
- When can carry be paid?
- What happens if later results change?
Questions specific to this scenario
- Where do fees arise at each layer?
- Which companies overlap?
- How are underlying reporting delays handled?
Request a look-through portfolio summary, fee-layer explanation, underlying cash-flow schedule, and the method used to reconcile reports. Identify missing or delayed underlying information.
A concrete next test
Trace one hypothetical company exposure through two underlying funds and the investing vehicle. Ask where fees, valuation dates, cash flows, and information delays enter each layer. Count the shared exposure once for analysis instead of treating two fund names as independent company diversification.
Interpret the result
An illustration teaches the question structure and arithmetic under stated assumptions. It does not describe every fund, predict a payout, or interpret the legal effect of a real waterfall.
Compare total exposure and costs across both layers. Keep the vehicle's distributions distinct from paper values reported by underlying managers.
Sources and method
These primary resources provide background for the concepts. The fictional scenario, calculations, and worksheet are ADIN educational examples; the sources do not report or validate those invented results. Reviewed October 11, 2026.