Recycling up to 120 percent of commitments plus a 24 month giveback, how hard should an LP push

Question

Picture an LPA for an opportunistic fund where two clauses sit next to each other in a way that deserves attention. The reinvestment section lets the GP recycle disposition proceeds and return of capital such that aggregate investments can reach 120 percent of total commitments, through the end of the investment period plus any extension. Separately there is a giveback: distributions can be recalled for up to 24 months after they are made, capped at 25 percent of contributed capital, to fund indemnity obligations or unfunded commitments. So money can go out, come back, go out again, and be clawed back for two years after it lands. On paper the LP's exposure exceeds the stated commitment and the capital is committed for longer than the ten year term suggests. Recycling is standard, and the GP will say it improves the multiple. The question is where the line sits between normal and aggressive, and what an LP can actually negotiate at a $2M commitment.

Rena Expert · Accepted Answer

Recycling to 120% of commitments inside the investment period is within the range of ordinary market terms for opportunistic funds. Some go to 125% or allow recycling of any capital returned within 18 months of investment regardless of the cap. The clause that decides whether it's aggressive is the time limit rather than the percentage. Recycling permitted only during the investment period is one thing. Recycling permitted through the end of the term, which some documents allow for proceeds from investments made during the investment period, is a much longer leash and it's where the effective hold period stretches on you.

On the giveback, 25% of contributed capital with a 24 month tail is standard, and the number you should care about is whether it's capped at 25% of your total commitment or 25% of amounts actually distributed to you. Those diverge badly in a fund that distributes early and often.

To anchor's point, yes, recycling pushes the return of capital out, and the extension provisions are where you should look next. Two one-year extensions at GP discretion behaves very differently from two one-year extensions requiring LPAC or majority-in-interest consent.

The item nobody has raised is expense treatment on recycled dollars. If the fee base during the investment period is committed capital, recycling doesn't change the fee. If the base is invested capital, recycling can mean you pay a management fee twice on the same dollar of commitment, and some LPAs are silent on it. Ask directly, in writing, how the fee is computed on redeployed proceeds. Whether any of this is enforceable as drafted in your jurisdiction is a question for your own counsel reviewing the actual document.

hannah_west29 · Answer

Recycling helps the multiple and flatters the IRR at the same time, which is why GPs like it. If they sell an asset in year two, return the capital, then redeploy it, the LP sees a distribution followed by a call, and the money is working twice on one dollar of commitment. On a fund targeting 1.8x, recycling to 120% is roughly the difference between 1.8x and something closer to 2.0x on committed dollars, assuming the second deployment performs like the first. That assumption is doing a lot of work and nobody underwrites it.

wendy_park48 · Answer

There are two different animals in your post, and they are worth separating. The 24 month giveback is a recall of distributions for indemnity and unfunded obligations. A clawback is the GP returning excess carry at the end of the fund because the waterfall overpaid them early. Check whether the LPA has both, whether the GP clawback is joint and several among the principals, whether it is escrowed, and whether it is stated gross or net of the taxes they paid on the carry. Net of tax clawbacks are common and they mean you recover less than the overpayment.

marcus_hale41 · Answer

At $2M you're probably not moving the recycling cap. What I'd ask instead is whether the LPAC has to consent to recycling after the investment period ends, and how many LPs got a side letter on this fund. If three of them did and you didn't, you're on worse terms than the people sitting next to you, and most LPAs let you request copies of side letters. Ask for them before you sign, not after.

ehernandez74 · Answer

Worth asking what 120% does to the date capital actually comes back. If proceeds keep getting redeployed through year five, assume the tail runs well past the stated term once extensions are counted.

Recycling up to 120 percent of commitments plus a 24 month giveback, how hard should an LP push

5 replies