Recycling (Reinvestment of Distributions)
Recycling is when a fund reinvests certain distributions back into new or follow-on investments instead of returning them permanently to LPs.
Allocator relevance: Changes true exposure and cash-flow expectations—recycling can extend deployment and affect DPI timing.
Expanded Definition
Recycling provisions allow the GP to reuse proceeds (often from early realizations, dividends, or returned capital) during the investment period (and sometimes within defined limits after). This can increase the fund’s effective invested capital without increasing committed capital, which may improve capital efficiency but can delay cash returns and shift the cash-flow profile.
Allocators evaluate recycling because it affects realized vs unrealized dynamics, pacing assumptions, and liquidity planning. It also matters for benchmarking: funds with aggressive recycling can look different on DPI timelines.
How It Works in Practice
The LPA defines what can be recycled (e.g., return of capital vs profit), within what time window, and caps on total recycling. LP reporting should clarify recycled amounts and how they affect distributions.
Decision Authority and Governance
Governance is embedded in the LPA limits and disclosure requirements. LPAC may have oversight where recycling interacts with conflicts or extensions.
Common Misconceptions
- Recycling is always LP-friendly because it “increases returns.”
- Recycling means the fund is bigger than stated (it increases effective deployment, not commitments).
- Recycling doesn’t matter for liquidity planning.
Key Takeaways
- Recycling shifts cash-flow timing and effective exposure.
- Evaluate caps, windows, and disclosure quality.
- Model DPI expectations with recycling in mind.