Reallocation Risk

Reallocation Risk arises when fundraising capacity changes near a close: an LP cuts its ticket, fails to execute, or withdraws; or the GP must rebalance allocations due to concentration limits or strategic priorities. This can happen even in oversubscribed funds—because the wrong dollars drop at the wrong time, creating timing and perception problems.

The risk is not just “lost capital.” It’s operational and reputational: reallocation consumes legal bandwidth, changes expected allocations for other LPs, and can turn a clean close into a scramble. The GP needs a disciplined mechanism for waitlists, drop-dead dates, and transparent treatment of papered vs non-papered commitments.

How allocators define reallocation risk drivers

• Late-stage execution risk: verbal interest not backed by docs
• Ticket volatility: LPs resizing due to pacing or internal constraints
• Concentration caps: forced cuts require reallocations
• Waitlist quality: depth of ready-to-close LPs
• Legal bandwidth: capacity to re-paper allocations quickly
• Deadline credibility: drop-dead dates and enforcement discipline
• Communication risk: how changes are explained to affected LPs
• Momentum impact: whether reallocations signal instability or weak demand

Allocator framing:
“Do they run reallocations as a governed process—or as a last-minute scramble?”

Where it matters most

• final close windows and quarter-end deadlines
• oversubscribed funds with aggressive cuts and waitlists
• emerging managers where momentum perception is fragile
• funds with complex docs and many side letters

How reallocation changes outcomes

Strong discipline:

• preserves close timelines despite LP changes
• minimizes relationship damage through transparent rules
• protects fundraising momentum by avoiding visible chaos

Weak discipline:

• creates legal delays and deadline slippage
• damages trust with LPs who feel treated unfairly
• invites retrading and negotiations as allocations shift
• turns “oversubscribed” into “uncontrolled”

How allocators evaluate discipline

Confidence increases when GPs:

• set execution deadlines and enforce them consistently
• maintain a qualified waitlist with pre-cleared diligence
• track paper status and prioritize signed docs over verbal signals
• communicate reallocation logic clearly and professionally
• document allocation decisions to ensure fairness and consistency

What slows decision-making

• last-minute dropouts without backup LPs ready
• MFN clauses requiring re-papering after allocation shifts
• unclear rules on who gets incremental capacity
• weak admin/legal capacity relative to LP volume

Common misconceptions

“Waitlists solve reallocations.” → only if the waitlist is diligence-ready.
“Reallocations are private.” → LPs talk; perception travels fast.
“Late drops are rare.” → they’re common; plan for them structurally.

Key allocator questions during diligence

• What are your drop-dead dates and how do you enforce them?
• How do you treat papered vs non-papered commitments?
• What is your waitlist policy and how do LPs qualify?
• How do you protect fairness when reallocations occur?
• What happens if the fund compresses and capacity shrinks?