Cash Flow Management

A written notice to investors requiring them to pay into the fund a portion of their commitment. The Limited Partnership Agreement sets a minimum notice period, normally 10 days.

Money received from a capital-gain event, as distinct from interest on a loan or return of loan principal. For a fund this is typically the proceeds of selling shares in a portfolio company. A portfolio company may also pay dividends which, depending on the beneficial owners' nationality, may be subject to withholding tax.

The fund returns money to its investors (Limited Partners and General Partner) in line with the waterfall provisions of the LPA. A distribution is preceded by a distribution notice, which gives background and typically categorises the money returned against the fund's waterfall (return of outstanding capital, outstanding preferred capital, interest, capital proceeds).

Distributions that are not in cash - most often shares in an underlying portfolio company. Like any distribution, they must be made proportionally to all limited partners.

Distributions of listed or otherwise liquid shares rarely cause difficulty, as investors can decide when to sell. Often, though, the shares are hard to realise, and in-specie distributions are generally unpopular with investors.

Numerous clauses and side-letter issues attach to them. The GP may have to consult the Investor Committee before distributing in specie, and the IC may even influence the valuation - which in turn affects performance figures and carried-interest calculations. Some investors refuse them outright and use a side letter requiring the GP to realise the asset and distribute cash instead. Distributing in specie can nonetheless be necessary to wind a fund up on time, and may serve investors' interests where an early forced sale would mean dumping shares at a low price.

Money held by a third party, normally a bank, on behalf of transacting parties. The funds are released only on the agreed instruction; in a dispute, that final instruction may be a court order.

An escrow account may run for a limited period, with funds held until an agreed date or condition. Some LPAs provide for early payment of carried interest to the GP, with part of those amounts held in escrow for a period or until conditions are met (see Clawback).

Distributions that, under the LPA, may later be subject to a second capital call - in other words, they increase remaining commitment.

Example 1 - Excess capital called: the GP called capital for a transaction that did not proceed and returns it; because the money was never put to work within the strategy, the distribution is recallable. Example 2 - Early exit: an investment is realised very quickly and the GP recalls the capital element (not the profit element). Other cases include money tied to bridge investments, guarantees, warranties or underwriting.