The liquidation of a fund will, generally, mean that all remaining assets of the fund will be realised and the proceeds used to repay all fund liabilities. Any cash (or other assets) remaining after the repayment of the fund liabilities will then be distributed to LPs in one final distribution, and any undrawn commitments cancelled. In certain jurisdictions, the liquidation process requires the formation of appropriate reserves for reasonably foreseeable obligations in the future. In all cases, the liquidation of a fund must be undertaken with care to ensure that neither the fund, the LPs, nor the GP are exposed to unacceptable potential liabilities following liquidation.
On liquidation, the GP (or the liquidator, if different) should make a thorough assessment of the risk of claims against the fund and should ensure suitable sums are held in escrow or subject to clawback arrangements to meet such claims. The escrow provision should also apply to a portion of the carried interest, or alternatively the carried interest should be subject to clawback for a specified period following the end of the life of the fund.