Provisions for Distributions From a Fund

Explanation

Clarity over what is distributed, how it is accounted for in the calculation of carried interest, whether it could be subject to recall, and how a distribution may impact uncalled commitments to the fund are all important issues. Addressing these will help ensure that disputes do not arise as to the apportionment of profits and losses between the GP and the LPs and that there is clarity regarding the LPs’ outstanding obligations to the fund.

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Over the time, any asset manager who does more than plan to manage own assets faces the problem of a transparent and convenient management infrastructure.

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Recommendation

The fund documents should include adequate provisions on distributions. These provisions should address at least the following issues:

• how profits and losses will be allocated between the GP and the LPs (the inclusion of a clear statement of intent on how the operation of the carried interest allocation will work and/ or a description of the distribution of proceeds waterfall will help this);
• when carried interest allocated to the GP may be distributed;
• GP clawback provisions;
• what special provisions may relate to distributions to the GP in respect of the GP’s investment in the fund;
• the extent of the GP’s discretion to make distributions;
• whether distributions can be made in-specie;
• how any distributions in-specie will be valued (generally this should be on a conservative basis or where freely tradable, reflecting the average daily trading price over an appropriate number of days). Due to restrictions on certain LPs concerning distributions in-specie, the process for
• making such distributions should be set out clearly in the fund documents;
• the extent to which distributions will take account of taxation liabilities;
• the extent to which the GP may be permitted to re-invest capital proceeds, dividend and other income, rather than distributing it;
• the need for distribution notices to identify clearly whether any of the distribution being made increases the LPs’ uncalled commitment to the fund, or is potentially subject to recall at a later date and if so under what provision of the fund documents;
• LP clawback provisions;
• how distributions will be classified (e.g. income or capital);
• the source of the distribution, e.g. sale of a company, dividend payment, interest payment, etc.;
• when distributions will be made.