In private equity, distributions are the mechanism by which funds return capital to their limited partners (LPs). While the concept is straightforward (returning money) its execution involves a series of structured steps, documentation, and operational coordination. This article outlines the typical anatomy of a distribution, focusing on what is commonly done across the industry.
1. Triggering the Distribution
Distributions are typically triggered by one of the following events:
Exit of a portfolio company (e.g., sale, IPO, recapitalization)
Receipt of dividends or interest income
Return of unused capital (e.g., at the end of fund life or after a broken deal)
The general partner (GP) determines the timing and amount of the distribution, often in consultation with fund finance and legal teams.
2. Calculating the Distribution Amount
The GP calculates the gross proceeds and then deducts:
Fund-level expenses
Management fees (if applicable)
Carried interest (if the hurdle has been met)
Escrow or holdbacks (if required for indemnification or post-close adjustments)
The net amount is then allocated to LPs based on their capital account balances and the fund’s distribution waterfall.
3. Preparing the Distribution Notice
A distribution notice is prepared and sent to LPs, typically including:
Total amount being distributed
LP-specific allocation
Source of proceeds (e.g., sale of XYZ portfolio company)
Date of expected payment
Wire instructions confirmation
Some funds also include a brief narrative or summary of the transaction, though this is not universally practiced.
4. Executing the Payment
Fund administrators or internal operations teams initiate the wire transfers. This step involves:
Verifying LP bank details
Coordinating with custodians or banking partners
Ensuring compliance with anti-money laundering (AML) and Know Your Customer (KYC) protocols
Timing is important, many funds aim to distribute within a few business days of closing a transaction, though this varies.
5. Updating Capital Accounts
Once the distribution is executed, LP capital accounts are updated to reflect:
Reduction in contributed capital
Realized gains or losses
Adjustments to preferred return and carried interest calculations
These updates are reflected in the next capital account statement or quarterly report.
6. Tax and Reporting Considerations
Distributions may have tax implications depending on the jurisdiction and nature of the proceeds. Funds typically:
Track character of income (e.g., capital gain vs. dividend)
Prepare tax estimates or K-1s (for U.S. investors)
Coordinate with tax advisors to ensure proper classification
7. Common Operational Practices
While practices vary, some common structural elements include:
Batch processing of wires to reduce administrative burden
Escrow accounts for post-close contingencies
Distribution tracking tools within fund administration platforms
These practices help streamline execution and reduce risk.
Conclusion
Distributions are a core function of fund operations, requiring coordination across investment, finance, legal, and administrative teams. While each fund may have its own nuances, the structural elements outlined above represent what is typically done across the industry. Understanding this anatomy helps LPs, service providers, and surrounding professionals better navigate the capital return process.