How are profits typically split in the final hurdle of a waterfall structure?

In the final hurdle of a waterfall structure, profits are typically split with 80% allocated to limited partners (LPs) and 20% to the general partner (GP). This reflects the critical stage in the distribution where the GP has already begun to earn a performance fee after an initial return of capital to LPs and preferred returns are met.

The rationale behind this division is to incentivize the GP to achieve high performance while ensuring that the LPs receive a significant portion of the profits, commensurate with the risk they have taken in investing. The splits can vary depending on the specific fund terms, but the 80/20 split is a commonly accepted standard in the industry once the threshold is crossed, recognizing the value added by the GP while also rewarding the LPs for their investment.

In contrast, the other suggested splits do not accurately reflect the conventional approach at this hurdle in a typical waterfall structure. For instance, a 50/50 split does not consider the additional risk and return relationships built in the fund's performance metrics, while 100% to LPs or all profits to the GP deviate from the standard expectations of profit-sharing dynamics between the two parties involved.