Recycling Provisions in Fund LPAs: Recalling Distributed Capital

A recycling provision in a fund LPA lets the GP call back, or keep and reinvest, capital that was already distributed — usually during the investment period and only up to a cap the LPA states. Recallable distributions restore unfunded commitment; non-recallable profit distributions generally do not. Deal-by-deal SPVs almost never recycle.

This is general information, not legal, tax, or investment advice. The LPA is the source of the cap, the window, and the types of proceeds that can be reused. This page does not invent a market-standard recycle percentage.

What a recycling provision in a fund LPA actually does

Recycling is a permission, not a metric. The GP receives sale proceeds (or a dividend, or a recap) and, instead of sending every dollar out as a permanent distribution, either (a) holds the cash in the vehicle and writes a new check, or (b) distributes the cash as recallable and later calls it again.

The economic point is to let the fund reach its intended invested cost after early exits, write-offs that return residual capital, and bridge financings that come back quickly. Without recycling, an early secondary on a seed name shrinks the book. With recycling, that returned cost can go into the next close.

It is not a subscription line. A line borrows against uncalled commitments. Recycling reuses capital that already came in. It is not a NAV facility either. And it is not the waterfall: carry still hits when a distribution is treated as a distribution under the LPA. See American vs European waterfalls.

Recallable versus non-recallable distributions

Write the two piles separately on every LP statement.

Recallable. The LPA treats the cash as a return of unused or recently used commitment that the GP may call again. The LP's remaining unfunded commitment goes back up by that amount (subject to the recycle cap). DPI printed on that wire is provisional. If the LP spends the distribution, a later call can still be due.

Non-recallable. The cash is a permanent distribution — often profit above cost, or proceeds after the investment period, or a type of proceeds the LPA excludes from recycle (for example, income, or proceeds from a write-off after year four). Remaining commitment does not increase. DPI is real for pacing purposes.

A third, quieter pile is retained proceeds: the GP never sent the cash out. Remaining commitment does not change because it was never reduced. The LP never saw a distribution. Reporting should still show that cash-at-fund is recycled cost, not a new call.

Dry powder is remaining unfunded commitment. Recycling is one of the adjustments that keep that number from falling in a straight line with invested cost.

Caps, windows, and types of proceeds

The LPA, not a blog, sets the numbers. Typical drafting axes — without a claimed market percentage:

• Time window. Recycling during the investment period only; a shorter window measured from the original investment; or a tail for follow-ons only.

• Type of proceeds. Return of cost only; cost plus a stated preferred amount; or all proceeds including profit. Profit recycle is more aggressive and is the clause LPs mark first.

• Use of recycled cash. New investments, follow-ons only, fees and expenses, or bridging a subscription line. Each use should be named.

• Cap. A percentage of aggregate commitments, a dollar amount, or "until invested cost equals commitments." Some LPAs cap recycle of recallable distributions separately from retained proceeds.

• LP-level versus fund-level. Whether an excused LP's recycle capacity can be used by others.

Do not put a "standard 120%" or "standard 20%" on a PPM unless counsel is quoting a deal you are actually in. This run has no primary source for a typical recycle cap, so none is stated.

If the fund also uses a subscription line, say how recycled cash and the line interact. Calling LPs to repay a line while simultaneously recycling a distribution is two cash movements that can net. Report them as two lines anyway.

How recycling changes unfunded commitment and DPI

On Form ADV, regulatory assets under management for a private fund include uncalled capital commitments: the adviser includes, in the fund's securities portfolio, "any uncalled commitment pursuant to which a person is obligated to acquire an interest in, or make a capital contribution to, the private fund." (SEC, Form ADV: Instructions for Part 1A, Item 5.F.) Recallable amounts that restore an uncalled commitment sit in that figure. Recycling is therefore an RAUM fact, not only an LP-statement fact.

DPI moves the other way. A recallable distribution can raise DPI in the quarter it goes out and lower the quality of that DPI if the GP can take the cash back. TVPI is less fooled: residual value plus distributions still has to add up. Definitions are on the IRR, MOIC, DPI, TVPI, RVPI page. Do not retarget that keyword here.

An in-kind distribution that the LPA treats as a distribution can consume recycle capacity the same way cash does, or it can sit outside the recycle clause if the clause is written on "cash proceeds" only. Flag that before you distribute stock. See in-kind distributions.

Recycle mechanics versus neighboring clauses

A capital call against a recallable balance should cite the recycle clause and the remaining room under the cap. LPs who only watch "commitment minus paid-in" will miss it.

Why deal-by-deal SPVs usually skip recycling

An SPV is one company. When that company exits, the vehicle is done. There is no second deal to recycle into. A follow-on in the same company is a new call or a reserved amount from the original close, not a recycle of a prior distribution.

If a syndicate lead wants to reuse an early partial sale, the clean structure is a new SPV or a committed fund with a recycle clause — not a silent reuse of SPV proceeds. Mixing those facts in one LLC operating agreement is how LPs end up unsure whether a wire was a distribution or a loan to the next deal.

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. Recycling, if any, is an LPA term the GP and counsel draft. The published fee is not a recycle policy.

Put the recycle cap, the window, and the proceeds types in one LPA section, then report recallable balances as their own line every quarter. LPs can underwrite a clause they can see. They cannot underwrite a verbal "we recycle cost."