Distributions

Definition

A distribution is a payment made by a fund to its investors (LPs), returning some or all of their invested capital and/or a share of profits. Distributions typically occur when the fund realises an investment (sells a company or asset) or generates income (interest, rent, dividends).

Caveat: Distribution mechanics — timing, sequencing, recallability, and format — are governed by the LPA and subscription documents. All terms below are general; specific funds may differ materially.

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Return of Capital vs Profit Distributions

A common misunderstanding is that any distribution represents profit. In practice, distributions follow a waterfall sequence that determines what type of cash is being returned:

Waterfall Stage	What the LP Receives	Nature
Return of capital	Their original invested capital	Capital return (not profit)
Preferred return	The agreed hurdle rate on their capital	Promised income return
GP catch-up	Primarily allocated to the GP until threshold met	GP allocation
Carried interest split	80% LP / 20% GP (or per LPA)	Profit share

An LP receiving an early distribution may be receiving a pure return of capital — their own money back — with no profit component. The LP capital account statement should distinguish between these types, but not all funds report this with sufficient granularity.

The sequence also matters for DPI interpretation: DPI counts all distributions regardless of waterfall source, so early DPI driven purely by capital returns is not evidence of profit generation.

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Recallable vs Non-Recallable Distributions

Not all distributions are final. LPAs define whether distributions can be recalled:

• Recallable distributions – The GP retains the right to call back previously distributed capital for new investments or to cover liabilities. This is governed by recycling provisions. If capital is recalled, the LP’s cumulative DPI is effectively reduced, and the previously reported DPI figure may be misleading.
• Non-recallable distributions – Once made, these cannot be recalled. They represent genuinely permanent cash received by the LP.

Whether a distribution is recallable depends entirely on the LPA. LPs should verify the status of each distribution from their fund documentation before treating it as permanent.

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Cash vs In-Kind Distributions

Most distributions are cash, but in-kind distributions also occur:

• Cash distributions – Fund account wires proceeds to each LP’s designated bank account
• In-kind distributions – The fund distributes shares in a listed company (typically after a portfolio company IPO) rather than selling first and distributing cash

Key implications of in-kind distributions:

• The LP receives securities, not cash, and must decide when to sell; market risk transfers from the fund to the LP at the time of distribution
• The distribution must be valued at the time it is made; that value determines the DPI credit and LP capital account impact
• Post-distribution price movements (up or down) are the LP’s risk, not the fund’s
• LP operational systems must be able to receive and book securities — not all systems can
• Tax treatment of in-kind distributions varies by jurisdiction and LP entity type

Caveat: In-kind distributions require careful valuation at the time of distribution and clear LP communication about booking and tax implications.

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Distribution Notice Contents

When a distribution is made, a formal notice is sent to each LP. A typical distribution notice includes:

• Fund name and LP name
• Total distribution amount and per-unit amount
• Nature of distribution (capital return, income, realisation proceeds, or a combination)
• Whether the distribution is recallable or non-recallable
• Waterfall calculation summary (particularly when carry is included)
• Payment date and payment method
• Reference to any associated tax documentation to follow

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Operational Process

1. GP decision – Exit or income event occurs; GP decides to distribute proceeds
2. Waterfall applied – Fund administrator calculates each LP’s entitlement using LPA mechanics (see Waterfalls)
3. Distribution notice issued – Sent to each LP with amount, nature, and payment date
4. Funds wired – Cash transferred to LP bank accounts (or securities delivered for in-kind distributions)
5. Capital accounts updated – DPI increases; RVPI may decrease if NAV was reduced at exit
6. Tax documentation – Relevant reporting documents issued as required by jurisdiction

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Relationship to Key Metrics and Concepts

Concept	How Distributions Connect
DPI	Increases with each cash distribution; the primary measure of actual cash returned
TVPI	TVPI = DPI + RVPI; distributions shift value from RVPI to DPI as assets are realised
RVPI	Decreases as portfolio companies are exited; exit drag occurs when exit prices are below carrying values
Waterfalls	Governs the sequence and allocation of distributions between LPs and the GP
Recycling Provisions	Govern whether distributions are recallable and available for reinvestment

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Related Files

• Waterfalls
• Carried Interest
• Drawdowns and Distributions
• Recycling Provisions
• DPI
• RVPI
• Capital Calls
• Investor Reporting

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Source Anchors

• ILPA Templates Hub — model distribution notice templates covering required fields, amounts, and LP-level allocation

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Manual Review Notes

• The tax treatment of distributions (capital return vs profit, in-kind vs cash) varies significantly by jurisdiction and LP entity type. This file does not address tax consequences. A dedicated tax-considerations file or link would be appropriate in a future bundle expansion.
• Some funds issue preliminary distribution notices before final numbers are confirmed; final notices follow once the waterfall calculation is fully verified. Operations teams should be clear about which type they are processing.
• In-kind distribution complexity is often underestimated: LP systems vary in their ability to receive securities, and the booking date vs sale date can create timing differences in DPI reporting. Flag this as a known operational risk for funds with portfolio company IPOs.
• Recallable distribution tracking is operationally important. If recalled distributions are not properly reflected in DPI reporting, LPs receive a misleadingly high picture of cash received. This is a common source of LP queries at advanced fund stages.