Private Funds Are Getting More Freedom to Recycle

Managers of private funds are often securing greater flexibility in how they recycle capital, a trend that could boost returns and provide crucial liquidity during uncertain markets.

To understand this evolution, we analyzed data from Goodwin’s Terms Database for Private Investment Funds, examining how recycling provisions have changed over time. In a previous article, we looked at overall caps, or the amount of capital that funds can recycle. Here, we identify the types of proceeds that funds are allowed to recycle and how long managers typically have to recycle proceeds. 

Types of Proceeds Available for Recycling

Fund documents typically allow managers to recycle amounts equal to management fees and fund expenses. This provision effectively ensures that 100% of investor commitments can be invested in actual deals rather than being eroded by fees and expenses.

Funds may also be allowed to recycle amounts that were returned to investors because they weren’t used for their intended purpose. These might include deal deposits for transactions that didn’t close or later investors’ equalization payments to earlier investors for the purpose of aligning their interests.

In some cases, managers can recycle proceeds from the acquisition cost of investments or bridging arrangements. This provision is important because it allows more than 100% of commitments to be invested, potentially enhancing returns. These recycling rights may be limited based on when the proceeds are realized.

Timing Restrictions on Recycling

Some funds that permit recycling are restricted to recycling proceeds that are realized within a relatively short window of time, typically 12 to 18 months after the initial investment. This limits recycling to investments that exit relatively quickly.

Other funds permit recycling of any proceeds realized during the investment period (typically the first three to five years of a fund’s life when it can make new investments) or, occasionally, beyond. This provides managers with significantly more flexibility to recycle capital throughout the fund’s life cycle.

Our analysis reveals a clear trend toward fewer time-based restrictions in recently launched funds, with managers and investors increasingly taking the view that the types of proceeds allowed for reinvestment can be widened if there is an overall cap. Based on data from Goodwin’s Terms Database for Private Investment Funds for all geographies, almost half (48%) of funds launched in the last four years have no restrictions on what amounts can be recycled other than the overall cap. This represents a 7% increase compared with all funds in our database.

 

This trend suggests a shifting mindset among managers and investors, with growing recognition that flexible recycling provisions can provide additional liquidity and potentially enhance returns.

Looking Ahead 

In our next article, we will look at limited partner clawback rights, with a focus on amounts that can be recalled outside of recycling limitations to satisfy fund indemnities and other liabilities.

For other data-backed insights from Goodwin’s Terms Database for Private Investment Funds, see our Funds Terms Intelligence hub.

 

This informational piece, which may be considered advertising under the ethical rules of certain jurisdictions, is provided on the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin or its lawyers. Prior results do not guarantee similar outcomes.