A distribution is a payment from a fund to its limited partners, returning either income generated by the fund's assets or capital realised through the sale or refinancing of an investment. Distributions reduce each LP's unreturned capital balance and, once the hurdle rate has been met, trigger the carried interest waterfall.
How it works
Distributions arise from three main sources: investment realisations (the sale of a portfolio company or asset), income events (dividends, interest, or rental income received by the fund), and refinancing proceeds where portfolio companies release equity through debt financing. The LPA defines which proceeds are distributable, in what order, and whether the GP is required to distribute within a specified period of receiving the proceeds or may recycle the capital into new investments.
The distribution waterfall determines how proceeds are divided between LPs and the GP. The first priority is return of LP capital contributions (and, in some structures, return of management fees and expenses). The second priority is the preferred return or hurdle rate, paid to LPs on unreturned capital. The third stage is the GP catch-up, which accelerates distributions to the GP until it has received its carried interest percentage on all profits distributed to that point. The fourth stage is the carried interest split, typically 80% to LPs and 20% to the GP, on all remaining proceeds.
The fund administrator is responsible for calculating each LP's pro-rata share of a distribution, preparing the distribution notice, issuing payment instructions, and updating each LP's capital account to reflect the payment. Where the LPA distinguishes between recallable and non-recallable distributions, the administrator must track each component separately, as recallable capital can be called back during the investment period.
Distribution payments are a high-value fraud target. The same bank account substitution risk that applies to capital calls applies in reverse to distributions: a fraudster who can redirect a distribution notice to a compromised LP email account, or intercept the administrator's payment instructions, can divert large sums before the fraud is detected. Infrastructure built with wire fraud prevention in mind holds all LP bank account details in a verified registry established at onboarding. Payment instructions never travel by email. Every distribution payment is matched to a pre-verified LP account in an immutable, fully auditable ledger, so that from notice to settlement the entire distribution cycle runs through one system without email as a trust dependency. LP bank account details can only be changed through a controlled, out-of-band verification process, not through an email request.
For private credit funds, distributions include scheduled interest and principal payments received from borrowers, PIK settlements, and proceeds from loan sales or repayments. The payment cadence is typically quarterly or monthly rather than event-driven, which changes the operational profile for fund administrators compared to PE structures.
Worked example
Aldgate Growth Fund II realises a portfolio company for GBP 120M. The fund invested GBP 50M of LP capital in the asset. After applying the waterfall: the first GBP 50M returns LP contributed capital (100% to LPs); the next GBP 12.5M (representing an 8% annualised preferred return over five years on GBP 50M) is paid to LPs; the following GBP 5.56M is paid to the GP as a catch-up (until the GP has received 20% of GBP 62.5M total profit); the remaining GBP 12M is split 80% to LPs (GBP 9.6M) and 20% to the GP (GBP 2.4M). The fund administrator calculates each LP's share of the LP-portion (GBP 72.1M in total) pro-rata to commitment, prepares distribution notices, and initiates verified bank transfers to each LP's registered account.
Frequently asked questions
What is the difference between a distribution and a return of capital? Return of capital is the component of a distribution that returns the LP's original invested amount, on which no carried interest is payable. Distributions above the return of capital and preferred return generate profit, on which the GP earns carried interest. LPs track both components separately because return of capital reduces their capital account balance while profit distributions do not.
Can a GP withhold distributions? LPAs typically grant the GP discretion over the timing of distributions, subject to any mandatory distribution provisions (some LPAs require distribution within a specified period of realisation). GPs sometimes withhold distributions to fund follow-on investments or cover anticipated expenses, though this must be permitted under the LPA's recycling and reserve provisions.
What is the difference between a cash distribution and a distribution in specie? A cash distribution transfers funds directly to LP bank accounts. A distribution in specie transfers assets (typically listed shares in a portfolio company after IPO) directly to LP securities accounts without first converting to cash. In-specie distributions require the fund administrator to verify LP securities account details before settlement, which adds complexity and counterparty verification requirements not present in cash distributions.
What is a recallable distribution? A recallable distribution returns LP capital during the investment period but the GP retains the right to call it back for future investments or fund expenses. The LP's commitment reduces by a smaller amount than a non-recallable distribution, and the administrator must track recallable balances separately. See the Recall / recallable distribution entry for a detailed worked example.
What technology do fund administrators use to process distributions? Fund administrators use integrated platforms that calculate waterfall allocations, generate distribution notices, initiate payments from verified LP account registries, and update capital accounts in a single auditable workflow. The critical risk in distribution processing is fraudulent redirection of payments, whether through a compromised LP email account or a fraudster impersonating the administrator. Platforms that hold LP payment details in a verified registry and route all payments through that registry, without relying on email-transmitted instructions, solve this structurally. Every LP will receive payment only to the account verified at onboarding and updated only through a controlled change process, never through an email instruction received after the fact.
Related terms
Distribution waterfall, Preferred return, Carried interest, GP catch-up, Return of capital, Recallable distribution, Distribution in specie, Capital account, Clawback
Related pages
How fund administrators process distributions, Swelv for fund administrators