What characterizes the final hurdle in a waterfall structure?

The final hurdle in a waterfall structure is characterized by the splitting of profits beyond the preferred return. This stage is crucial as it indicates how any excess profits after meeting the preferred return obligations will be distributed between the Limited Partners (LPs) and General Partners (GPs).

In a typical waterfall structure, the preferred return is the amount that must be paid to the LPs before profits are shared. Once this preferred return is met and additional profits are generated, the final hurdle kicks in to determine how those extra profits will be allocated. This is often done through a pre-agreed percentage split that may favor the GPs or continue to provide returns to the LPs until certain thresholds are reached.

This mechanism is significant because it incentivizes GPs to exceed the minimum return expectations for the LPs, aligning their interests and fostering a performance-driven environment. Understanding this structure is essential for analyzing private equity agreements, as it dictates how profits are ultimately shared among the investment partners.