A distribution is any return of funds to an investor. Typically, this comes about when a fund sells one or more of its assets (when it “exits an investment”).
Which partners receive a share of a distribution will be set out in the Limited Partnership Agreement (“LPA”) and will be determined by a number of factors. The priority in which various parties receive whichever share they are entitled to of the distributable funds is called the DISTRIBUTION WATERFALL.
How it works
The actual process of distributing funds varies from fund to fund and is agreed between the General Partner (“GP”) or Manager, and the Limited Partners (“LPs”) as part of the investment negotiations and subscription process. The process is recorded in the LPA.
A typical process would be:
- The General Partner or Manager instructs its fund administrator to calculate the distributions, according to the rules in the LPA
- The amount to be paid to each investor is agreed with the General Partner or Manager
- The fund administrator creates the distribution notices, which are approved by the General Partner or Manager
- The fund administrator sends the distribution notices to the recipients of each Limited Partner nominated during the subscription process
- Any feedback is processed (e.g. change in bank account details for an investor)
- Cash arrives into the investor’s nominated bank account on the agreed date
Typically, a distribution notice might contain:
- Information on the reasons for the availability of distributable funds (e.g. sale of an asset)
- The amount to be distributed
- References to clauses in the Limited Partnership Agreement (LPA)
- Details of when and into which bank account the investor’s share will be distributed
- The total amount drawn and distributed
- The amount of the distribution that may be redrawn by the General Partner or Manager
The fund administrator may ask each investor for confirmation that the bank account is unchanged, but it is typically incumbent on the investor to confirm to the administrator any changes in banking details.
Sometimes, a DRAWDOWN and DISTRIBUTION happen simultaneously, which can result in a single notice being sent to investors, either a net distribution or a net drawdown, depending on whether the net amount is positive or negative, from the investor’s perspective. This can lead to a “dry” distribution if the amount drawn at the same time matches the distribution.
For some funds, an LPA will provide for a redrawable distribution, whereby, in the case of a capital (rather than an income or capital gains) distribution, the capital distributed can be recalled and reinvested in further investment opportunities by the fund manager. This is usually restricted by time e.g. if the original investment was made within 2 or 3 years, or perhaps if the distribution occurred during the investment period of the fund.
