The selection of an appropriate distribution waterfall structure is a core component of private credit fund design that determines how profits are allocated, incentives are aligned and a fund’s risk-return philosophy is signaled to prospective investors. Those can vary widely across private credit funds, however, depending on the strategies at play and the fundamental characteristics of the wide array of potential types of underlying assets targeted thereby. Further, whereas the return profiles for traditional PE funds are dominated by capital appreciation, private credit funds must design waterfalls that account for the regular generation of current income through interest payments and fees; the treatment of payment-in-kind interest and original issue discount; capital appreciation from equity participations; convertible notes or distressed scenarios; and early realizations through secondary sales, refinancings, prepayments and liability management exercises. Those types of current income generation often require private credit sponsors to deviate from the traditional American- and European-style waterfalls that are typical of PE funds. This second article in a two-part guest series by Willkie Farr partners Samuel Weber and John M. Knapke outlines several types of waterfall structures – and relevant variations within each – that are used to align with the risk, reward and return profiles of each asset class. The first article described the core asset types and related return drivers of various private credit asset classes, including infrastructure debt and dislocation funds. See “Emerging Industry Trends Include Rise of Evergreen Structures, Tax Complications and Private Credit Funds” (Jan. 9, 2025).