A distribution waterfall sets the order in which available proceeds are allocated between investors and the manager. The rules are contractual and differ across funds.
A preferred return or hurdle is an allocation threshold. It is not a promise that the fund will earn or pay that return. The following example explains one mechanism; it is not a forecast or a description of every Portuguese fund.
Read the governing definitions first
Identify the capital base, the preferred-return convention, its start date, the carry rate, any catch-up and whether the calculation is fund-wide or linked to individual investments. Also check the treatment of fees, earlier distributions and remaining commitments.
Worked example: one payment after five years
Assume:
- Investors contribute EUR 100,000 at year 0.
- Available proceeds at year 5 are EUR 160,000.
- The example applies an 8% annual compound preferred return on the full contribution for five years.
- The manager receives 20% carry, with a full catch-up.
- There are no interim payments. The illustration excludes management, subscription, tax and other costs.
These assumptions are chosen to make the arithmetic transparent.
1. Return the contributed capital
Allocate EUR 100,000 to investors. Available proceeds fall to EUR 60,000.
2. Allocate the preferred return
The preferred-return amount is:
EUR 100,000 × (1.08^5 − 1) = EUR 46,932.81.
Allocate that amount to investors. Available proceeds are now EUR 13,067.19.
3. Apply the catch-up
In this example, full catch-up allocates the next proceeds to the manager until its share reaches 20% of profit distributed through that point:
EUR 46,932.81 × 20 / 80 = EUR 11,733.20.
Available proceeds are now EUR 1,333.99, using rounded amounts.
4. Split the remaining proceeds
Allocate the balance 80% to investors and 20% to the manager.
| Allocation | Investors | Manager |
|---|---|---|
| Return of capital | EUR 100,000.00 | — |
| Preferred return | EUR 46,932.81 | — |
| Catch-up | — | EUR 11,733.20 |
| Remaining split | EUR 1,067.19 | EUR 266.80 |
| Total | EUR 148,000.00 | EUR 12,000.00 |
The totals reconcile to EUR 160,000. In this illustration, the manager receives 20% of the EUR 60,000 total profit after the full catch-up is completed.
Investor-level result in this example
The investor pays EUR 100,000 at year 0 and receives EUR 148,000 at year 5. The final multiple is 1.48x, and the annual IRR is approximately 8.16%.
This result excludes the costs listed above. Including them requires changing the cash flows or available proceeds according to the actual terms; costs should not be assumed to have no effect on distributions.
Other arrangements
Funds can use different hurdles, simple rather than compound accrual, partial or no catch-up, high-water marks, class-specific definitions or different allocation mechanisms. If there are insufficient proceeds to fill a waterfall tier, the example cannot be completed as shown.
The calculation also changes when contributions or distributions occur on several dates. A final preferred-return total should not be applied unchanged to a different payment schedule.
Distributions and Golden Visa
For Golden Visa research, record the nature and timing of each proposed payment and confirm the immigration and tax treatment with qualified counsel. This worked example does not establish whether any specific distribution preserves an applicant's qualifying investment.
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