Follow-on Reserves
Follow-on reserves are capital set aside to invest in later rounds of existing portfolio companies, especially top performers.
Allocator relevance: Directly impacts dilution protection, ownership outcomes, and the ability to concentrate into winners.
Expanded Definition
Reserves are part of the fund’s capital planning: how much is allocated to new deals versus supporting existing ones. Under-reserving can force managers to watch winners dilute; over-reserving can reduce new deal activity and weaken diversification. Reserve strategy also interacts with deployment pace and the fund’s overall capacity.
Allocators often look for a clearly articulated reserves policy that matches the manager’s strategy and stage focus.
How It Works in Practice
Managers budget reserves at fund formation, then adjust dynamically based on portfolio performance and opportunity quality. Reserve deployment often prioritizes companies with strong traction and favorable pricing relative to expected outcomes.
Decision Authority and Governance
Governance defines reserve allocation rules, approval thresholds, and exceptions. LPs may evaluate whether reserve usage is consistent with stated policy through reporting.
Common Misconceptions
- Reserves guarantee pro-rata participation.
- A fixed reserves percentage works for every strategy.
- Reserves eliminate the need for new deal sourcing.
Key Takeaways
- Reserve strategy is a core portfolio construction tool.
- Balance is required: dilution protection vs new deal diversification.
- Track reserve usage against policy over time.