Glossary · Fund lifecycle
Distributions
Also called: fund distributions
Distributions are payments of cash, or transfers of securities in kind, from a fund to its partners out of investment proceeds or income, allocated between limited partners and the general partner according to the fund's distribution waterfall.
When a fund sells a company, receives interest or dividends, or refinances an investment, it passes the money back to its investors. The waterfall in the limited partnership agreement (LPA) decides how much goes to LPs and how much to the GP as carried interest. Distributions are what turn a fund's paper value into cash for investors.
Sources of distributable proceeds
Proceeds come from exits (sales, IPOs, recapitalisations), current income (interest, dividends, rent), and partial realisations. Before distributing, the fund may retain amounts for expenses, reserves, debt repayment or, where the LPA allows, recycling into new investments. Distribution timing is usually at the GP's discretion within LPA limits, and many LPAs require proceeds to be distributed within a stated period after receipt.
The waterfall
Distributable proceeds are apportioned among partners and then run through the waterfall: return of contributed capital, a preferred return if any, a GP catch-up, then the carried interest split. In a whole-of-fund (European) waterfall LPs receive all contributions back before the GP shares in profits; in a deal-by-deal (American) waterfall carry can be paid on each realised deal, with a clawback as the backstop.
Cash and in-kind distributions
Most distributions are cash. A distribution in kind transfers securities, typically listed shares received after an IPO or a share-for-share sale. The LPA sets how in-kind securities are valued for waterfall purposes (often a market price averaged over days around the distribution date) and usually restricts in-kind distributions of non-marketable securities before the fund's dissolution. LPs that cannot or do not want to hold the shares may appoint a liquidating agent or ask the GP to sell on their behalf. The value an LP realises can differ from the value used in the waterfall.
Characterisation: return of capital, income and gain
For performance purposes, every distribution counts in DPI. For accounting and tax purposes the same cash may be a return of capital, income or gain. In a US tax partnership, partners are taxed on their allocated share of partnership income whether or not it is distributed, reported on Schedule K-1. This is why many LPAs permit tax distributions: advances, typically to the GP, to cover taxes on allocated carried interest, credited against later distributions.
Recallable distributions
Some distributions may be called back. Common cases are capital returned from an investment exited within a short period of acquisition, distributions needed later to fund indemnities, and amounts the LPA allows to be recycled. A recallable distribution increases the LP's unfunded commitment. See recallable distributions.
Distribution notice
Each distribution is accompanied by a notice stating the total amount, the LP's share, the source (which investment, income or gain), the split between return of capital and profit, any amount recallable, withholding taxes deducted, and the payment date. Withholding can apply to foreign partners' shares of US effectively connected income, so non-US LPs may receive less than their gross allocation.
Worked example
Illustrative distributions and fund multiples
An LP has paid in $80m. The fund has distributed $60m to it and its remaining interest is valued at $50m. Distributions to paid-in capital (DPI) is 0.75x, residual value to paid-in (RVPI) 0.63x and total value to paid-in (TVPI) 1.38x (rounded). Only the 0.75x is cash in hand; the rest depends on future exits.
Examples are illustrative; figures are not market data.
Not the same as
- Capital Call: Calls move cash into the fund; distributions move cash or securities out to partners.
- Distributions to Paid-In (DPI): DPI is a ratio summarising cumulative distributions relative to paid-in capital; distributions are the underlying payments.
Common mistakes
- Treating all distributions as profit. Early distributions are mostly return of capital.
- Valuing an in-kind distribution at the waterfall price without allowing for the price at which the LP can actually sell.
- Forgetting that recallable distributions can be called again.
- Confusing tax allocations with cash distributions; a partner can owe tax on income it has not received.
Edge cases
- Distributions funded by a NAV facility or GP-led recapitalisation return cash without a full exit; guidance from the Institutional Limited Partners Association (ILPA) recommends LPAC consent whenever facility proceeds fund distributions.
- A GP clawback at the end of a fund can require the GP to return carried interest previously distributed.
- Distributions in kind of restricted securities may be subject to lock-ups that limit the LP's ability to sell.
Questions
When do private equity funds start distributing?
Usually after the first exits, often several years into the fund's life. Income-oriented strategies such as private credit distribute earlier and more regularly.
What is a distribution in kind?
A transfer of securities, usually listed shares, instead of cash. The LPA sets how they are valued for the waterfall.
Sources
- ILPA Model Limited Partnership Agreement (Whole of Fund and Deal-by-Deal versions). Institutional Limited Partners Association, ILPA, Whole of Fund first released October 2019, updated July 2020; Deal-by-Deal version and term sheet released 22 July 2020. Status: Current (checked 2026-10-01). WOF Art. 14 (14.1.3 distribution notice; 14.3 waterfall; 14.4 distributions in kind); deal-by-deal version — supports: Whole-of-fund waterfall; distribution notices consistent with the ILPA template; in-kind distributions limited to cash or marketable securities before final winding up, with LP election to have securities sold; deal-by-deal apportionment by relative capital contributions
- Partner's Instructions for Schedule K-1 (Form 1065) (2025). Internal Revenue Service, Tax year 2025 instructions (accessed 2026-10-01). Status: current (checked 2026-10-01). Partner's Instructions for Schedule K-1 (Form 1065) (2025), 'Purpose of Schedule K-1' — supports: The partnership generally is not subject to income tax; a partner may be liable for tax on its share of partnership income whether or not distributed
- 26 U.S.C. 1446 - Withholding of tax on foreign partners' share of effectively connected income (incl. 1446(f)). U.S. Congress (Internal Revenue Code; LII mirror), Current US Code text as published by LII (accessed 2026-10-01). Status: in force (checked 2026-10-01). Sec. 1446(a) — supports: A partnership with effectively connected taxable income allocable to a foreign partner pays a withholding tax
- NAV-Based Facilities: Guidance for LPs and GPs. Institutional Limited Partners Association, ILPA, Published 25 July 2024. Status: Current (checked 2026-10-01). Recommendations — supports: LPAC consent where NAV facility proceeds fund distributions