In a waterfall structure, what does the catch-up provision allow the General Partner to do?

The catch-up provision in a waterfall structure is an important feature that allows the General Partner (GP) to align their profit-sharing with the interests of Limited Partners (LPs) after LPs have received their preferred return. This mechanism is designed to incentivize the GP and ensure they are rewarded for their performance.

Once the LPs have received their preferred return, which is typically a predetermined percentage of their investment, the catch-up provision enables the GP to "catch up" on their share of profits. This means that a specified portion of the profits will be allocated to the GP until they reach their agreed-upon profit-sharing percentage. Essentially, the catch-up allows the GP to receive a larger percentage of the distributions during this phase, benefiting them once the LPs have received their returns.

By enabling the GP to quickly attain their target profits after LPs are made whole, this provision fosters a performance-driven relationship between the GP and LPs. It reinforces the concept of sharing risks and rewards fairly, with the GP incentivized to maximize the overall success of the investment.

In contrast, the other options do not accurately describe the purpose or function of the catch-up provision within a waterfall structure.