Explanation

In private equity fund structures, there are two main types of waterfall distribution methods:

European Waterfall (Deal-by-Deal)

• Distribution Basis: Performance fees (carried interest) are calculated and distributed on a deal-by-deal basis
• Advantage: This method is more advantageous to the General Partner (GP) because:
  1. The GP receives carried interest earlier in the fund's life
  2. The GP doesn't have to wait until all investments are realized
  3. Even if later deals underperform, the GP has already received carried interest on successful early deals

American Waterfall (Whole Fund)

• Distribution Basis: Performance fees are calculated at the aggregated fund level
• Advantage: This method is more advantageous to the Limited Partners (LPs) because:
  1. The GP only receives carried interest after all capital contributions have been returned to LPs
  2. The GP must wait until the entire fund's performance is known
  3. This prevents the GP from receiving carried interest on early successes if later deals cause overall fund underperformance

Key Differences

• European Waterfall: Deal-by-deal, GP-friendly, allows earlier carried interest distribution
• American Waterfall: Whole fund, LP-friendly, ensures GP only profits if entire fund succeeds

Therefore, option A is correct: A European waterfall distributes performance fees on a deal-by-deal basis and is more advantageous to the general partner than an American waterfall.