European Waterfall

A fund-level carry structure in which the general partner's or fund manager's share of profits is calculated only after all limited partner capital across the entire fund has been returned along with a preferred return, meaning the manager typically does not receive carried interest until the fund as a whole — not just individual successful investments — has cleared this threshold. In a litigation finance fund context, the European waterfall aligns the manager's incentives with overall portfolio performance rather than with any single case's early success, since a string of early wins cannot generate carry payments to the manager if the fund's aggregate capital has not yet been returned to investors. This structure is generally viewed as more investor-favorable than a deal-by-deal alternative, since it prevents a manager from being paid on individual winning cases while investors are still underwater on the fund as a whole.

Institutional limited partners allocating to litigation finance funds increasingly favor European waterfall structures specifically because the asset class's binary case-level outcomes make deal-by-deal carry particularly susceptible to a manager being paid well before the fund's investors have actually been made whole. Fund managers negotiating fee terms with early anchor investors sometimes concede to a European waterfall specifically to win commitments from institutions whose own investment policies require it as a threshold term.