A distribution waterfall is a mechanism for dividing investment returns or capital gains among individuals involved in a collective or pooled investment. Primarily linked with private equity funds, this distribution method establishes the sequence in which limited and general partners receive their shares. In most cases, the general partners are awarded a disproportionately higher percentage of the total profits relative to their initial investments upon completion of the allocation process. The purpose behind this approach is to motivate the fund’s general partner to optimize profitability on behalf of its investors.