Majority of LPs Demand Greater Transparency and Customization in Waterfall Distributions

New global study by CSC reveals growing complexity and pressures in alternative fund management

WILMINGTON, Del.--(BUSINESS WIRE)--New research by CSC surveying senior executives in the private capital industry and institutional investors reveals that an overwhelming majority of limited partners (LPs) are calling for greater transparency in waterfall distributions—the order in which investment returns are allocated.

The new report "Distribution Waterfalls 2024: Transparency, Technology, Trust" by CSC¹, a leading provider of business, legal, financial, and digital brand services, surveyed 200 GPs and 200 LPs across North America, Europe, and Asia Pacific, to understand their views on transparency and customization in waterfall calculations.

According to the findings, 86% of LPs believe it is important or critical to enhance clarity around the timing and structure of distributions. The report underscores the growing pressure on general partners (GPs) to meet these demands, particularly as liquidity events slow down and waterfall provisions become more complex.

Almost two-thirds (64%) of LPs have pushed back on waterfall provisions they found lacking in transparency, with 39% choosing not to commit to certain investments due to these concerns. Key areas of scrutiny include the return of contributions, preferred return to LPs, and carried interest to the GP.

“There needs to be greater collaboration and alignment between GPs and LPs,” says Alejandro Jr. Tan, senior manager of fund services at CSC. “The renaissance of private markets offers more opportunities for both GPs and LPs. However, it’s critical that they work towards achieving better alignment of interests, increased transparency, fairness, and trust-building.”

LPs are losing confidence in the accuracy and transparency of waterfall calculations. Nearly three-quarters (74%) report that waterfalls have become progressively more complicated over the past two years, further hindering clear reporting and communication. Compounding the computational complexity is a greater demand for customization among LPs. In fact, 66% of LPs believe that GPs should tailor terms and transparency levels to better align with their individual preferences, as a one-size-fits-all approach no longer meets diverse needs.

In response, nearly half (46%) of GPs anticipate that they will need to allocate more resources to meet LP demands for customization in waterfall provisions, while 43% expect to spend significant time and energy addressing these needs.

To address growing complexity and transparency requirements, many GPs are turning to technology and outsourcing specialized providers. Research shows that 50% of GPs have invested in technology over the past two years to enhance transparency and reduce calculation errors. Additionally, 61% plan significant upgrades over the next two years to strengthen their systems, highlighting the need for robust technology infrastructure.

Tan added, “The growing demand for transparency and customization in waterfall provisions is prompting more GPs to embrace outsourcing. By partnering with third-party specialists, GPs can ensure accurate and efficient waterfall calculations, leveraging their expertise to build trust. LPs value precise and accurate calculations that align with contractual terms. As specialist intermediaries, third-party providers can also help to mitigate conflicts of interest.”

To receive a copy of CSC’s “Distribution Waterfalls 2024: Transparency, Technology, Trust” report, contact Amber Liu at [e-mail].

About CSC

CSC is the trusted partner of choice for more than 90% of the Fortune 500^®, more than 90% of the 100 Best Global Brands (Interbrand^®), and more than 70% of the PEI 300. We are the world’s leading provider of global business administration and compliance solutions, specialized administration services to alternative asset managers across a range of fund strategies, transactions involving capital markets participants in both public and private markets, domain name system management and digital brand and fraud protection, and corporate tax software solutions. Founded in 1899 and headquartered in Wilmington, Delaware, USA, CSC prides itself on being privately held and professionally managed for more than 125 years. CSC has office locations and capabilities in more than 140 jurisdictions across Europe, the Americas, Asia Pacific, and the Middle East. We are a global company capable of doing business wherever our clients are—and we accomplish that by employing experts in every business we serve. We are the business behind business^®. Learn more at cscglobal.com.

¹ CSC, in partnership with Pure Profile, surveyed 200 GPs and 200 LPs equally distributed between North America, Europe, and Asia Pacific in July 2024, to understand their views on transparency and customization in waterfall calculations.