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- 🛠️ Investment Fund Key Terms, Part 9
🎉 Happy Friday, funds family!
Today, we have Part 9 in our many-part series walking through each term in an investment fund term sheet in detail.
Last week, we discussed the 🛠️ Investment Period. Today, we'll learn about Capital Recycling.
But first..
/ SELF PROMOTION
If you’re a sponsor (GP) raising an investment fund or syndication in private equity, private credit, real estate, or venture capital, we may be a good fit for you. We also represent limited partners (LPs) investing in funds and syndications.
Thanks for reading. Now, let’s jump into the article 😃
When a fund sells or refinances an investment, the proceeds are usually distributed back to investors. But sometimes, the GP is allowed to reinvest those proceeds into new deals. That’s called capital recycling. ♻️
Here’s what a capital recycling provision might look like:
“The General Partner may, during the Investment Period, reinvest proceeds received from the sale, disposition, or refinancing of Portfolio Investments in additional Portfolio Investments, provided that such reinvestments occur prior to the expiration of the Investment Period and do not cause total Capital Contributions to exceed 115% of the aggregate Capital Commitments of the Limited Partners.”
➡️ Why recycle capital?
Capital recycling allows the GP to increase the fund’s impact without increasing commitments. It’s common in strategies where capital can be returned and redeployed quickly (like credit funds), but you might find recycling in any asset class.
For example, let’s say a credit fund makes short-term loans that are repaid within a year. Rather than sending that money back to LPs or keeping idle cash in the fund, the GP can recycle those proceeds into new loans until the investment period ends. Recycling keeps capital working, increases the number of investments, and improves diversification.
➡️ Limits and conditions
Capital recycling isn’t unlimited. Most LPs want to cap it to avoid hidden “fund size creep.”
🛑 Typical limits might include:
Timing: Reinvestment is allowed only during the investment period.
Sources: Only proceeds from realized or repaid investments can be recycled.
Amount: Recycled capital cannot exceed the total commitments, or a higher cap, such as 125% of commitments.
➡️ What happens after the investment period?
Once the investment period ends, recycling usually ends too. At that point, proceeds are distributed, not reinvested—unless the LPs or the LPAC expressly approve.
➡️ What about open-end funds?
In open-end funds, unlimited recycling is often the default. If LPs want a return of capital, they can withdraw funds pursuant to the fund’s redemption procedures.
🗓️ Next up in Part 10: Investment Limitations
Thanks for reading, everyone.
Have a great weekend! 🙌
/ JURY TRIAL
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