Recycling Provisions

Recycling provisions define whether and how proceeds (including returned capital, early realizations, or certain distributions) can be re-deployed into investments rather than distributed to LPs.

From an allocator perspective, recycling is not inherently good or bad — it’s a duration and exposure lever. The key question is whether recycling supports disciplined portfolio construction or becomes a tool to prolong deployment and economics.

How allocators define recycling risk drivers

Allocators evaluate recycling through:

• Eligible proceeds: what can be recycled (capital, income, fees, etc.)
• Caps: % of commitments or amount limits on recycled capital
• Time limits: cutoffs tied to investment period or later windows
• Use cases: follow-ons only vs new investments allowed
• Fee base interaction: whether recycled capital increases fee base duration
• Disclosure: how recycled amounts are reported and forecasted
• Pacing impact: how recycling affects exposure timing and diversification
• Governance: whether LP consent is required for expanded recycling

Allocator framing:
“Is recycling preserving strategy consistency — or quietly extending the fund’s risk window?”

Where recycling matters most

• venture funds with early exits and follow-on needs
• credit funds with frequent repayments
• strategies with rapid turnover where redeployment can compound
• any fund where pacing models are sensitive to duration

How recycling changes outcomes

Strong recycling discipline:

• supports follow-on strategy without additional commitments
• improves capital efficiency in a controlled window
• stabilizes pacing and ownership defense when planned

Weak recycling discipline:

• extends effective duration beyond what LPs underwrote
• increases late-cycle selection risk
• makes cash flow forecasting and allocation modeling less reliable

How allocators evaluate recycling discipline

Conviction increases when managers:

• set clear caps and time limits aligned to strategy
• restrict recycling primarily to defined needs (often follow-ons)
• report recycled capital separately and transparently
• show historical recycling usage vs stated policy

What slows allocator decision-making

• broad recycling allowed beyond the investment period
• unclear definition of eligible proceeds
• recycling that implicitly sustains fees longer than expected
• weak disclosure and forecasting around cash flows

Common misconceptions

• “Recycling always improves returns.” → it can increase timing risk.
• “Recycling is just operational.” → it changes duration and exposure.
• “Caps are optional.” → caps are a core governance control.

Key allocator questions during diligence

• What proceeds are eligible and what is excluded?
• What are the caps and time limits?
• Can recycled capital fund new investments or only follow-ons?
• How does recycling affect fee base and duration?
• How do you report recycling usage historically?