What is the Fund Distribution Waterfall?

The fund distribution waterfall ensures that profits from a fund’s investments are distributed in a structured and prioritized way. This structure is designed to protect investors by making their returns the top priority, while also incentivizing the fund manager to deliver strong performance. The profits are divided into different "buckets," filled in a specific order: 1) Return of Capital: The first responsibility of the fund manager is to repay the initial capital that investors contributed. 2) Hurdle Rate (or preferred return): After the initial capital is returned, the hurdle rate comes into play, which is a minimum performance target the fund must achieve. 3) Catch-Up: Once the hurdle rate is paid, the catch-up phase ensures the fund manager receives their fair share of profits in accordance with the agreed profit-sharing structure. 4) Profit Split: After the catch-up phase, any remaining profits are divided between the investors and the fund manager based on the agreed profit-sharing ratio (typically 80%-20%).

What is the '2 and 20' fee structure?

The most common fee structure in private equity, known as "2 and 20," defines how a fund manager is compensated. The 2% refers to the annual management fee paid by investors to the fund manager, while the 20% represents the share of net fund profits—referred to as carried interest or "carry"—that is paid to the fund manager.

What is Total Value to Paid-In Capital (TVPI)?

The Total Value to Paid-In Capital (TVPI) represents the total value generated by the fund for every euro of capital invested. It is calculated as the sum of Distributed to Paid-In Capital (DPI) (cash already returned to investors relative to their investment) and Residual Value to Paid-In Capital (RVPI) (the current estimated value of the fund's remaining investments relative to their investment).

What is Internal Rate of Return (IRR)?

The Internal Rate of Return (IRR) measures the annualized rate of return on an investment, taking into account the timing of all cash inflows (distributions) and outflows (capital calls). It is highly sensitive to the timings of these cash flows. Even with the same total amount invested and the same total amount returned, shifting the timing of these flows can significantly impact the calculated IRR.

How does a single capital call impact Golden Visa investor performance compared to staggered calls?

The Portugal Golden Visa program requires investors to deploy their full committed capital upfront. This contrasts with the standard practice in private equity where non-GV investors usually experience staggered capital calls, with the Fund Manager drawing down capital as investment opportunities arise. The upfront capital deployment by the GV investor means their entire investment is "at work" from the beginning, which can negatively impact the IRR compared to a non-GV investor who benefits from deploying capital over time.

How do dividend-only distributions during residency impact Golden Visa investor performance?

Golden Visa regulations require maintaining the initial minimum €500,000 investment for a specific period (at least five years). During this time, GV investors might prefer or need to receive distributions primarily as dividends rather than capital reductions to ensure their invested amount remains above the required threshold. This can delay the receipt of capital gains and the full return of capital compared to non-GV investors, negatively impacting the GV investor's Internal Rate of Return (IRR) even if the total return (TVPI) is the same.

Which performance metric should Golden Visa investors prioritize?

Given the potential for IRR to be significantly influenced by the timing of capital reductions, which can be uncertain for GV investors, we recommend placing a greater emphasis on analyzing TVPI (Total Value to Paid-In Capital). TVPI provides a more stable measure of the overall return multiple achieved by the fund, irrespective of the specific timing of cash flows. For Golden Visa investors, TVPI offers a less misleading indicator of the total value generated by the investment over its life.

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Understanding how Capital Distributions work

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Cristóvão Matos

Managing Director

Nomera Capital

Published: Nov 27, 2024Updated: Apr 29, 2025