A waterfall structure is a tiered system that determines how investment returns are distributed. Just as water flows down in stages, capital flows through each tier only after the previous one is satisfied. The waterfall is designed to:
- Prioritize investor capital
- Align sponsor performance with investor success
- Create transparency in how and when profits are shared
The Typical Waterfall Tiers
1. Preferred Return (add a link to preferred return blog)
The investor receives a fixed return before the sponsor earns anything.
- Commonly 7–9% annually (ours is typically 8%)
- Cumulative: If not paid one year, it accrues into the next
- Acts as a baseline “hurdle” — sponsors don’t earn promote until investors receive this
✅ Investor benefit: Downside protection, predictable return expectation
2. Return of Capital
Once the preferred return is met, the investor’s original principal is returned.
- 100% of the initial capital is paid back before further splits
- Ensures sponsors only share in upside after full investor recovery
✅ Investor benefit: Strong capital preservation logic
3. Profit Sharing Begins (Tier 1 Promote)
After pref and capital return, profits are split.
- Typically 80% to Investor / 20% to Sponsor
- Reflects initial incentive alignment
✅ Investor benefit: Majority of upside still belongs to LPs
4. Performance-Based Hurdle (Tier 2 Promote)
If performance exceeds a target return (often 15% IRR), the sponsor’s share increases.
- At Cramlet Capital, we structure this as:
- 80/20 split up to 15% IRR
- 75/25 split thereafter
✅ Investor benefit: The sponsor only earns more if they significantly outperform projections
Why This Matters to Sophisticated Investors
Many new investors think of returns in terms of IRR or equity multiple — but the waterfall determines who actually receives those returns, and when. The structure is what transforms projected outcomes into real capital distributions.
At Cramlet Capital, our approach is to:
- Align long-term interests through performance hurdles
- Avoid “catch-up” clauses that dilute LP returns too early
- Offer multiple share classes based on investor priorities
We don’t just build the waterfall to be fair — we build it to reflect our conviction in the deal.
Cramlet Capital Class Share Class Philosophy
While every offering is tailored, here’s a simplified look at how we think about investor classes:
| Share Class | Designed For | Return Profile |
|---|---|---|
| Cash Flow Class | Yield-focused investors | Higher cash-on-cash, no equity |
| Wealth Class | Balanced growth & income | Preferred return + equity upside |
| Strategic Class | Ultra-high-net-worth allocations | Custom terms, no hurdles |
Minimums typically range from $50K to $1M, and structures are designed to optimize both cash flow and IRR alignment — while ensuring sponsors are incentivized to perform across all scenarios.
Conclusion
The waterfall is more than a financial framework — it’s the contractual embodiment of trust. It defines how risk and reward are shared, and whether your sponsor is aligned with your long-term goals.
At Cramlet Capital, our waterfalls are built with institutional discipline and entrepreneurial empathy. They protect investor capital, reward performance, and reflect the seriousness with which we treat each dollar entrusted to us.
Next Steps: Explore the Strategy, Not Just the Structure
We’ve built our track record by offering clear, transparent investment structures tailored to investor goals. But the real value is in the strategic design behind each offering.