A subsequent close worked from the capital calls: the contribution, the interest, the fee catch-up, and what the rate actually transfers.
Equalisation interest is calculated call by call: the late investor's pro rata share of each earlier capital call, multiplied by the equalisation rate and by the days that call has been outstanding until the subsequent close. On a $60m commitment joining a $300m fund a year after first close, at 8 per cent, that is $0.90m, not the $1.20m you get by charging interest on the whole catch-up from first close.
Worked in full in The Private Equity Fund Controller Playbook by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
The interest is the small number in a subsequent close. It is also the one that most often goes wrong, because it is quick to compute the lazy way and the lazy answer looks plausible. The arithmetic below is the version a fund controller can defend to the auditor and to the first-close investors who are receiving the money.
A fund holds its first close on 1 January 2025 with $300m of commitments. It calls capital twice before the second close. On 1 January 2026 a new investor commits $60m, taking the fund to $360m. The limited partnership agreement sets equalisation interest at 8 per cent a year, simple, actual/365, and charges the management fee on commitments from first close at 2 per cent.
| Input | Value |
|---|---|
| First-close commitments | 300.0 |
| Call 1, 1 February 2025 | 60.0 |
| Call 2, 1 August 2025 | 30.0 |
| Paid in before the second close | 90.0 |
| New commitment at second close | 60.0 |
| Fund size after the second close | 360.0 |
| Equalisation rate | 8% |
| Management fee on commitments | 2% |
After the second close every investor must stand at the same percentage paid in. The fund has called $90m. Spread over $360m of commitments that is 25.0 per cent, down from 30.0 per cent on the first-close base. The new investor's share is 60 ÷ 360, one sixth, so it pays $15.0m, and that $15.0m goes straight back to the first-close investors pro rata to their commitments. They end at $75.0m paid in on $300m: 25.0 per cent, the same as the newcomer.
The equalisation contribution is a capital contribution. It reduces the new investor's unfunded commitment, and the refund to existing investors is typically recallable, so their unfunded commitment goes back up by the same amount. Check the agreement: that recallable treatment is the line most often missed in the investor register.
The first-close investors are compensated for having funded the portfolio while the new investor kept the use of its money. So the interest runs on the newcomer's share of each call, from the date of that call, not from first close.
Interest = Σ (calli × new commitment ÷ fund size) × rate × daysi ÷ 365
In Excel, with call amounts in B, call dates in C and the second-close date in F1:
=SUMPRODUCT(B2:B3*60/360*0.08*(F1-C2:C3)/365)
| Call | Call amount | New investor's share | Days to second close | Interest at 8% |
|---|---|---|---|---|
| 1 February 2025 | 60.0 | 10.0 | 334 | 0.73 |
| 1 August 2025 | 30.0 | 5.0 | 153 | 0.17 |
| Total | 90.0 | 15.0 | 0.90 |
The $0.90m is paid by the new investor to the first-close investors, pro rata to their commitments. It sits outside the commitment: it does not reduce anyone's unfunded balance, and it is usually reported as income to the receiving investors rather than as a return of capital. Some agreements route it through the fund as income, others pay it directly; the amount is the same either way.
The fee is charged on commitments from first close, so the new investor owes a year of fee it did not pay: $60m × 2 per cent × 365 ÷ 365 = $1.20m. This goes to the manager, not to the other investors, which is why it belongs on a separate line of the notice.
| Second-close notice | $m | Goes to |
|---|---|---|
| Equalisation contribution | 15.00 | First-close investors, recallable |
| Equalisation interest | 0.90 | First-close investors, income |
| Management fee catch-up | 1.20 | Manager |
| Total cheque from the new investor | 17.10 |
The shortcut is to take the $15.0m equalisation contribution and charge a full year of interest on it: $15.0m × 8 per cent = $1.20m. That overstates the interest by $0.30m, or 33.4 per cent, because no capital was outstanding in January 2025 and only two thirds of it was outstanding before August. The weighted average age of the paid-in capital is 273.7 days, or 0.75 of a year, and the correct interest is three quarters of the shortcut.
Interest runs from each call date, not from first close. The fee catch-up runs from first close because the fee base is commitments. Mixing the two conventions is the error: the fee and the interest look like the same calculation and they are not.
The interest is a proxy for the gain the new investor would otherwise collect for free. Suppose the $90m invested is marked at $103.5m at the second close, a 15 per cent uplift. The new investor buys one sixth of that, $17.25m of value, for $15.0m plus $0.90m of interest: $15.90m. The first-close investors transfer $1.35m of value to the newcomer.
The 8 per cent compensates for an uplift of exactly 6.0 per cent on this timing. Above that the newcomer gains; below it, the first-close investors gain.
| Equalisation rate | Interest | Total cheque | Value transferred to the newcomer | Break-even uplift |
|---|---|---|---|---|
| 0% | 0.00 | 16.20 | 2.25 | 0.0% |
| 4% | 0.45 | 16.65 | 1.80 | 3.0% |
| 6% | 0.67 | 16.87 | 1.58 | 4.5% |
| 8% | 0.90 | 17.10 | 1.35 | 6.0% |
| 10% | 1.12 | 17.32 | 1.13 | 7.5% |
| 12% | 1.35 | 17.55 | 0.90 | 9.0% |
To make the first-close investors whole on a 15 per cent uplift the rate would need to be 20.0 per cent, which no newcomer would sign. That is the honest reading of equalisation interest: it is a negotiated price for late entry, not a valuation. When the portfolio has moved well above cost, some funds equalise at fair value instead; when it has fallen, as in a 10 per cent markdown, the newcomer overpays by $2.4m at 8 per cent. The controller's job is to compute the agreed formula exactly, and to be able to show the investor committee what it transfers.
The second-close case with these mechanics, and the fee true-up, is laid out in the free workbook for this case, alongside the register that rolls every capital account. For what a late or missing contribution costs the other side, see what a missed capital call actually costs; for the fee base itself, how to recompute a management fee after offsets.
Usually not. The equalisation contribution, $15.0m in the worked case, is a capital contribution and reduces unfunded commitment. The interest, $0.90m, is paid on top of the commitment and is typically treated as income to the first-close investors who receive it. The agreement governs, so the register should follow its wording rather than a house convention.
The investors who funded the earlier calls, pro rata to their commitments, either directly or through the fund as income. The management fee catch-up is different: it goes to the manager. In the worked case the new investor pays $0.90m of interest to existing investors and $1.20m of fee catch-up to the manager, on a total cheque of $17.10m.
Only at one portfolio outcome. With capital outstanding for 0.75 of a year on average, 8 per cent compensates the first-close investors for a 6.0 per cent uplift on cost. If the portfolio is marked 15 per cent up, the newcomer still gains $1.35m of value; a rate of 20.0 per cent would be needed to close that gap.
Subsequent closings are covered in chapter 3 of The Private Equity Fund Controller Playbook, and the second-close case is worked in the free companion files. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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