Foundational Difference

American Waterfall
Vs.
European Waterfall  

The main difference between an American waterfall and a European waterfall structure lies in how they distribute carried interest (the share of profits that fund managers receive) in private equity and venture capital funds.

American Waterfall

In an American waterfall structure, the distribution of profits is done on a deal-by-deal basis. This means that fund managers can start receiving their carried interest after each individual deal achieves a certain return, without needing to wait for the overall fund to reach its return targets. Here's a breakdown of how it typically works:

1. Return of Capital: Investors first receive their initial investment back.
2. Preferred Return: Investors receive a preferred return (a predefined rate, often 8% per year) on their invested capital.
3. Catch-Up: Fund managers receive a portion of the profits to "catch up" with the preferred return rate given to investors, ensuring they receive their carried interest percentage (often 20%) on the profits.
4. Carried Interest Split: After the catch-up phase, profits are split according to the carried interest arrangement (e.g., 80% to investors, 20% to fund managers).

European Waterfall

In a European waterfall structure, the distribution of profits is based on the overall performance of the fund rather than individual deals. Fund managers receive their carried interest only after the entire fund has returned all capital to investors and achieved the preferred return. Here's how it typically works:

1. Return of Capital: Investors receive their initial investment back across the entire fund.
2. Preferred Return: Investors receive the preferred return on their total invested capital.
3. Catch-Up: Fund managers receive a portion of the profits to achieve their carried interest percentage on the entire fund's profits.
4. Carried Interest Split: After the catch-up phase, profits are split according to the carried interest arrangement.

Key Differences

• Timing of Carried Interest: In the American structure, fund managers can receive carried interest after each successful deal, whereas, in the European structure, they must wait until the entire fund has returned capital and achieved the preferred return.
• Risk to Fund Managers: The European structure typically involves more risk for fund managers since they must ensure the entire fund performs well before receiving carried interest. In contrast, the American structure allows fund managers to benefit from successful individual deals earlier.
• Investor Preference: Investors might prefer the European waterfall because it aligns fund managers' incentives with the overall performance of the fund, rather than individual deals.

These differences can significantly impact the incentives for fund managers and the overall risk and return profiles for investors.

Why Our European Waterfall Structure is a Win for Investors

When it comes to investing, aligning the interests of fund managers and investors is crucial for long-term success. Our European waterfall structure does just that by ensuring that fund managers are rewarded only after investors have recouped their initial investment and received a preferred return. This approach not only mitigates risk but also promotes a holistic view of portfolio performance, enhancing investor confidence and trust. By focusing on high-quality investments and maintaining a diversified portfolio, we strive to deliver consistent, attractive returns. In this article, we will explore the key benefits of our European waterfall structure and how it serves the best interests of our investors.

Benefits of a European Waterfall Structure for Investors in Our Diverse Portfolio

1. Aligned Interests
The European waterfall structure ensures that fund managers' interests are closely aligned with those of the investors. Since managers receive their carried interest only after the entire fund has returned all capital and achieved the preferred return, they are incentivized to maximize the overall performance of the fund. This alignment promotes prudent investment decisions and long-term value creation, benefiting investors.

2. Risk Mitigation
Investors in a European waterfall structure enjoy greater protection and reduced risk. The structure mandates that all initial capital must be returned to investors before fund managers earn their performance-based compensation. This means that fund managers are motivated to focus on the long-term success and stability of the entire portfolio, rather than individual short-term gains.

3. Holistic Portfolio Performance
With a European waterfall, the success of the fund is measured by the collective performance of all investments. This approach encourages diversification and strategic planning across the portfolio. By investing in a diverse array of assets, we mitigate risk and enhance the potential for consistent returns. Our commitment to a well-rounded, diverse portfolio ensures that investors are not overly exposed to the risks associated with any single investment.

4. Investor Confidence and Trust
The European waterfall structure builds investor confidence and trust. Knowing that fund managers are only rewarded after investors receive their capital and preferred returns fosters a sense of security. This transparency and alignment of interests create a strong foundation for a long-lasting, trust-based relationship between investors and fund managers.

5. Emphasis on Quality Investments
Since fund managers need to achieve overall fund performance targets before earning their carried interest, they are incentivized to select high-quality investments. This focus on quality over quantity ensures that each investment is carefully vetted and strategically chosen to contribute positively to the fund's performance.

6. Enhanced Return Potential
By prioritizing the overall success of the fund, the European waterfall structure can enhance return potential for investors. With a diverse portfolio that spreads risk and targets steady, long-term growth, investors are more likely to see consistent, attractive returns on their investments.

Conclusion

Our commitment to a European waterfall structure demonstrates our dedication to aligning our interests with those of our investors. This structure, combined with our diverse and well-managed portfolio, ensures that we prioritize the long-term success and stability of the fund. By investing with us, you are choosing a partner who is committed to maximizing your returns while minimizing risk, fostering a relationship built on trust, transparency, and shared goals.

LEADING BY EXAMPLE 

Welcome to "The True North" International Investment Fund, where we navigate the financial landscape with precision and integrity. Our fund is designed to deliver superior returns through a meticulously managed, diverse portfolio, leveraging the robust European waterfall structure to align our interests with those of our investors. At "The True North," we are committed to fostering long-term growth, minimizing risk, and ensuring transparency and trust in every investment decision. Join us on our journey to achieve unparalleled financial success and stability.

[ THE TRUE NORTH ] - A.R.K Nation