A recycling clause lets the fund reinvest proceeds up to the fees it charged, so that the whole commitment goes to work. The gain has a one-line formula.
Recycling adds recycled capital × (gross multiple − 1) × (1 − carry rate) to what limited partners receive. On an illustrative 500 fund that recycles 65, the amount of its fees and expenses, at a 2.0x gross multiple, LPs gain 52, lifting the net multiple from 1.592x to 1.696x. At a gross multiple of 1.0x the gain is zero, and below it recycling costs money.
Worked in full in How to Read a Limited Partnership Agreement by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Every closed-ended fund has the same leak: fees and fund expenses are paid out of commitments, so without recycling a fund can never invest all the money its investors signed for. A 500 fund that charges 65 over its life puts at most 435 to work. The recycling provision in the limited partnership agreement plugs the leak by letting the general partner reinvest some proceeds rather than distribute them, so that invested capital can reach 100 per cent of commitments. The clause is usually read as boilerplate. It is worth a tenth of a turn of multiple.
| Input | Value |
|---|---|
| Commitments | 500 |
| Management fees and fund expenses over the life | 65 |
| Recycling cap, equal to fees and expenses | 65 |
| Gross multiple on invested capital | 2.0x |
| Carried interest | 20% |
Invested capital = commitments − fees + recycled. Without recycling: 500 − 65 = 435, 87 per cent of commitments. With: 435 + 65 = 500.
Gross proceeds = 2.0 × invested: 870 without, 1,000 with.
Distributed before carry = proceeds − recycled: 870 without, 1,000 − 65 = 935 with. The 65 is proceeds that were reinvested instead of paid out.
Profit = distributed − commitments: 370 without, 435 with. Carry at 20 per cent: 74 and 87.
Net to LPs: 870 − 74 = 796 (1.592x) without; 935 − 87 = 848 (1.696x) with.
The difference is 52, or 0.104x on commitments, and it falls straight out of the formula. The recycled 65 earns 2.0x, so it adds 65 × (2.0 − 1) = 65 of profit, of which the GP takes 20 per cent, 13, and LPs keep 52. In Excel, with recycled capital in B1, gross multiple in B2 and carry in B3: =B1*(B2-1)*(1-B3).
Before carry, the multiple on commitments goes from 1.74x to 1.87x. Notice that paid-in capital does not change: LPs fund 500 either way. Recycling does not ask for more money; it keeps money already called at work instead of returning it and leaving the fee leak unfilled.
| Gross multiple | Net multiple, no recycling | Net multiple, recycling | Gain to LPs |
|---|---|---|---|
| 0.9x | 0.783x | 0.770x | −6.5 |
| 1.0x | 0.870x | 0.870x | 0.0 |
| 2.0x | 1.592x | 1.696x | 52.0 |
| 2.5x | 1.940x | 2.096x | 78.0 |
| 3.0x | 2.288x | 2.496x | 104.0 |
Recycling is leverage on the manager's skill. A strong fund at 3.0x gross turns the clause into a fifth of a turn of extra multiple, a 2.0x fund into a tenth; a fund that loses money loses a little more with it. At exactly 1.0x gross it changes nothing, and the 0.870x row is a reminder of what the fee leak costs on its own: a fund that merely returns its invested capital gives LPs back 87 cents in the dollar.
| Recycling cap | Invested capital | Invested, % of commitments | Net multiple |
|---|---|---|---|
| 0 | 435.0 | 87.0% | 1.592x |
| 32.5 | 467.5 | 93.5% | 1.644x |
| 65 | 500.0 | 100.0% | 1.696x |
| 100 | 535.0 | 107.0% | 1.752x |
A cap above fees and expenses lets the fund invest more than 100 per cent of commitments. That is not automatically good for LPs: it extends the fund's exposure without new consent and raises the GP's carry base. Most agreements cap recycling at fees and expenses, at a percentage of commitments, or both.
What to read in the clause. Three limits decide what the provision is worth: the cap (fees and expenses, or a percentage of commitments); the time window (often proceeds realised within a set period of the investment, or only during the investment period); and whether recycled amounts are treated as distributed and recalled, which restores the investor's unfunded commitment, or simply retained. The last point changes what the capital account statement shows, not the economics above.
The common mistake is to judge recycling on the multiple alone. The extra 52 arrives late: recycled capital is invested after the first exits and returned near the end of the fund's life, so the IRR gain is much smaller than the 0.104x multiple gain suggests, and a recycling clause that extends the holding period can even lower the IRR. The opposite mistake is to see recycling as a GP-only term because it raises carry. In this case the GP gains 13 and LPs 52: the clause mostly benefits the investors, provided the manager is good.
Value a recycling provision with one line: recycled capital times the gross multiple minus one, times one minus carry. Then read the cap and the time limit, because they decide how much of the fee leak can be filled. The fee and waterfall model in the free workbooks for this book lets you run your own fund's terms. For how large the fee leak is in the first place, see what a 2 per cent management fee costs over a fund's life.
A clause that allows the GP to reinvest some distributable proceeds instead of paying them out, usually capped at the fees and expenses drawn, or a percentage of commitments, and often limited to proceeds realised within a set period of investment. In the worked case it lets a 500 fund invest the full 500 instead of 435.
Yes, when the recycled capital loses money. The gain is recycled capital times the gross multiple minus 1, so below 1.0x it turns negative. In the worked case at a 0.9x gross multiple recycling 65 costs LPs 6.5. It also keeps capital at work for longer, which lowers IRR relative to the multiple gain.
Yes, because it increases total profit. In the worked case at 2.0x gross, recycling adds 65 of profit, of which the GP takes 13 in carry and LPs keep 52. That is why the clause is usually capped, so that the GP is not paid carry on an ever-larger invested base.
This article is one calculation from How to Read a Limited Partnership Agreement. 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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