Two Model Agreements, One Clause Apart.

Two of ILPA’s model limited partnership agreements are supposed to represent opposite philosophies for paying a general partner — swap their cover pages, and a reader wouldn’t notice anything had changed until Article 14. The two documents disagree in exactly one place: a single clause inside Article 14, governing how a limited partner’s capital comes back before the general partner is paid anything from a deal. That one clause is the entire difference between what the industry calls a deal-by-deal waterfall, often shorthanded as the American structure, and a whole-of-fund waterfall, its European counterpart.

Where the return-of-capital tier splits

Both documents run the same first move on any distribution: apportion the proceeds by each partner’s share, then pay the limited partner ahead of the general partner’s carried interest. Section 14.3.1 sets what has to come back to that partner before the tier is satisfied, and it is the one place the two documents actually disagree. The whole-of-fund version returns “such Partner’s aggregate Capital Contributions” — the partner’s entire funded commitment to the fund, every investment counted together. The deal-by-deal version returns only the capital that funded “such Portfolio Investment,” each other realized investment, and the fund’s aggregate unrealized losses — a tally scoped to what has actually been sold, not to the fund as a whole.

The consequence runs through every tier after it. A whole-of-fund general partner cannot reach the preferred return, let alone carried interest, until every dollar a limited partner put into the entire fund has come back. A deal-by-deal general partner can reach carry on one winning investment while capital committed to investments still on the books has not been returned at all.

Why the difference cascades to clawback

That one difference in timing is the reason a clawback provision exists at Section 14.7 of both documents in the first place. A deal-by-deal general partner can be paid carried interest on an early winner years before the fund’s later investments resolve — if those later investments underperform, the general partner has already collected more than the fund’s eventual result would have entitled it to, and the clawback claims the excess back. A whole-of-fund general partner cannot get ahead of the fund this way: by the time any carry flows, every limited partner already has its full committed capital and preferred return in hand, leaving little room for the fund’s later results to reveal an overpayment. Both agreements still run a periodic clawback test in the background as a backstop. What differs is how much work that backstop actually has to do: constant, in a fund paying carry one realization at a time, and rare, where the return-of-capital tier already keeps the general partner behind the fund’s overall result.

Reading which one governs your fund

A fund does not need a waterfall model to tell which structure its own agreement runs — the language sits in Section 14.3.1 itself, or its equivalent in a non-ILPA agreement. If the return-of-capital tier is scoped to the specific investment being realized, the fund is running a deal-by-deal waterfall, the American-market convention. If it returns the limited partner’s entire aggregate contribution before that tier is satisfied, the fund is running a whole-of-fund waterfall, the European convention. The label matters past the terminology: it decides whether a distribution notice this quarter reflects the fund’s whole result or only one investment’s, and whether a clawback the fund books this year is remote or worth modeling before the next realization.

What people call an “American” or “European” waterfall comes down to a single test, run once, in one distribution tier, over whose money comes back first — not two different philosophies of fund economics, just one clause deciding an order of payments. The rest of the agreement was never the question.