Recycling (Reinvestment of Distributions)

Definition

Definition Recycling provisions permit the fund to reinvest proceeds—often from early realizations, return of capital, or certain income—rather than distributing them immediately to LPs. Recycling can improve portfolio efficiency and allow the manager to maintain deployment in the investment period, but it also affects LP cash flow timing and true exposure. Allocator Context Allocators evaluate recycling to understand actual capital at work and expected distribution timing. Recycling can be beneficial when used transparently and within clear constraints. It becomes controversial when it extends exposure beyond LP expectations or shifts the fund’s risk profile later in life. Decision Authority Recycling terms are negotiated in the LPA and reviewed by legal and IC teams. Some allocators have policy views on acceptable recycling limits, particularly when cash flow predictability is important. Why It Matters for Fundraising Recycling changes the LP experience. Managers who explain recycling clearly—what can be recycled, within what cap, and how it impacts distributions—avoid future friction and protect re-up credibility. Key Takeaways Changes timing of distributions and exposure Can improve capital efficiency within investment period Must be constrained and transparent Impacts LP cash flow planning and perception of liquidity