In-Kind Distributions in Private Funds: Stock Instead of Cash

An in-kind distribution in a private fund pays limited partners securities — usually the portfolio company's stock after an IPO or a stock-for-stock sale — instead of cash. The LPA must permit it. The administrator then moves shares, cost basis, and any restrictive legend to each LP. This page is not an offer of securities and does not guarantee tax treatment.

This is general information, not tax, legal, or investment advice. Nothing here is a buy, hold, or sell on any named stock. Talk to tax counsel before you treat a distribution as non-recognition or assign a basis number to an LP.

When an in-kind distribution in a private fund is used

GPs use in-kind (also called a distribution in specie) when the vehicle holds listed or soon-to-be-listed stock and selling it inside the fund is worse than handing the shares out. Common triggers:

• An IPO lock-up is ending and the GP does not want the fund to be the seller of record.

• A stock-for-stock acquisition leaves the fund holding acquirer shares.

• The fund is winding down and the remaining position is public, thin, or both.

• An LP has asked, in a side letter or in the LPA, to take securities rather than a cash residual.

The waterfall still runs. In-kind is a form of payment, not a skip of carry. See American vs European waterfalls. The GP values the distributed securities as of a stated date, applies preferred return and carry to that value, and delivers a net share count to each LP. If the LPA is silent on valuation, stop and amend or get LPAC consent. Do not invent a price.

A cash sale inside the vehicle, followed by a wire, is the default in most SPVs. The GP guide to SPV distributions covers that path. This page is the stock-delivery path.

What the LPA and waterfall still have to do

Read three clauses before you announce an in-kind:

1. Permission. Does the LPA (or operating agreement) let the GP distribute property other than cash? If yes, is it optional or mandatory once a listing occurs?

2. Valuation. Closing price, VWAP, a third-party mark, or a number the GP sets in good faith? Write the rule in the notice.

3. Carry and recalls. Is the distributed value treated as a distribution for waterfall and clawback? Can the GP later recall cash against an in-kind that was booked too high?

Give LPs a notice that states the security, CUSIP or ISIN if any, number of shares, valuation date, valuation method, tax lot / holding-period information the admin has, and whether a legend remains. Tell them where the shares will land (broker, transfer agent, DRS). Do not tell them to hold or to sell.

If recycling is on, an in-kind that is treated as a distribution can reduce recallable capital the same way a cash distribution does. That interaction is on the recycling provisions page.

How shares actually move

The admin's work is transfer-agency and brokerage, not a capital call.

• Collect each LP's brokerage details or DRS account. An LP with no account cannot take shares. Have a cash-election or a delayed-delivery rule for that LP, or the GP is stuck holding a stub.

• Work with issuer counsel and the transfer agent on legend removal or a restricted book-entry position. Only the transfer agent removes a restrictive legend, and only with the issuer's consent, usually an opinion letter. (SEC, Rule 144: Selling Restricted and Control Securities, last reviewed 16 January 2013.)

• Break the fund's position into LP-level lots. Pro rata to commitments is the usual default; the LPA may use capital-account balances instead.

• Book the distribution on the capital accounts at the stated value so DPI and remaining NAV stay reconcilable. Metrics definitions live on the IRR / MOIC / DPI / TVPI page.

• Send a distribution notice and a tax-lot statement. K-1s later have to match that lot.

Odd lots, fractional shares, and LPs below a broker's minimum are the usual breakage. Decide in the notice whether fractions are cashed out, rounded, or held back.

Cost basis and tax treatment — talk to counsel

Under section 731 of the Internal Revenue Code, a partner generally does not recognize gain on a partnership distribution except to the extent money distributed exceeds the partner's adjusted basis in the partnership interest immediately before the distribution. The partnership generally recognizes no gain or loss on a distribution of property, including money. (26 U.S.C. § 731.)

Section 731(c) can treat marketable securities as money for that gain test. Whether a given listed stock is "marketable securities" for that purpose, and whether an exception applies, is a facts-and-counsel question. This page does not apply § 731(c) to your distribution.

Section 732 sets the partner's basis in distributed property other than money. In a current (non-liquidating) distribution, that basis is generally the partnership's adjusted basis immediately before the distribution, capped at the partner's remaining basis in the interest after money distributed in the same transaction. In a liquidating distribution, the basis of the property is the partner's remaining basis in the interest after money. Have the tax advisor compute lots. Do not copy a fund-level average cost onto an LP statement and call it done.

None of that is a guarantee of non-recognition, character, or holding period for any LP. State-tax, non-U.S., and unrelated-business-income overlays are outside this page.

Cash, in-kind, or a mix

The mix is the usual cleanup for odd lots. State the cash-election rule in the notice so LPs are not surprised.

Restricted stock and Rule 144 after an IPO

Shares the fund bought in a private round are restricted securities. Rule 144 is a safe harbor for public resale of restricted and control securities, not an obligation to sell. For a reporting issuer, the Rule 144 holding period for restricted securities is at least six months; for a non-reporting issuer it is at least one year. The holding period starts when the securities were bought and fully paid for. Affiliates also face volume limits, manner-of-sale rules, and a Form 144 notice when the sale exceeds 5,000 shares or $50,000 in a three-month period. A non-affiliate who has not been an affiliate for at least three months and has held restricted securities of a reporting issuer for at least one year can sell without the other Rule 144 conditions. (SEC Rule 144 investor publication, last reviewed 16 January 2013.)

Tacking — whether the LP inherits the fund's holding period — is a securities-law call for issuer counsel, not for the admin. Put the holding-period facts you have in the notice. Do not tell an LP they are free to sell.

This is not an offer of those securities. The distribution is a transfer of an existing position under the LPA, not a new offering by Allocations or by the GP.

SPV versus committed-fund processing

A single-asset SPV usually distributes once, then winds down. The SPV exit-strategies page covers the cash and secondary paths. In-kind on an SPV is a short project: one security, one valuation date, one set of broker letters.

A multi-asset fund may distribute one name and keep the rest. Capital accounts stay open. Later cash exits have to live alongside the in-kind already booked. Clawback math gets harder if the in-kind name later falls; the LPA should say whether carry is locked on the distributed value.

On Allocations, a Standard SPV is $9,950, a Premium SPV is $19,500, and a fund is $19,500 per year, with 0% platform carry. Those fees do not include a Rule 144 opinion or a transfer-agent push.

If the LPA allows in-kind, write the playbook before the IPO prices: broker template, legend process, cash-election for LPs who cannot take stock, and a tax-lot method. The close is the wrong week to invent those.