One final close, $630m of demand for $362m of room, and three allocation policies worked LP by LP, with the minimum ticket and the gross-up problem.
In an oversubscribed fund the capacity left under the hard cap is divided among the final-close requests by a written allocation policy, usually re-ups first up to their prior commitment and pro rata for the rest. On an illustrative $900m hard cap with $630m of final-close demand for $362m of room, a flat pro rata gives everyone 57.46 per cent of their request; re-up priority gives existing LPs their prior commitment in full and new LPs 34.63 per cent, falling to 32.11 per cent once two small tickets are raised to the $10m minimum.
Worked in full in Private Equity Investor Relations by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
A scale-back is the one moment in fundraising when the investor relations team tells LPs, in dollars, how much the firm values them. Done by feel, it produces side conversations, inflated orders and resentful new relationships. Done by a policy written before the final close, it produces a number every LP can check. The policy needs four things: the capacity, the order of priority, the pro rata base, and the treatment of tickets that fall below the minimum.
| Item | Amount |
|---|---|
| Target | 750 |
| Hard cap | 900 |
| GP commitment, inside the cap | 18 |
| Already admitted at earlier closes | 520 |
| Capacity for the final close | 362 |
| Final-close requests from prior-fund LPs (re-ups) | 300 |
| Their commitments to the prior fund | 220 |
| Final-close requests from new LPs | 330 |
| Minimum ticket | 10 |
Demand at the final close is 630 against 362 of room, 1.74 times capacity, and the fund as a whole is 268 over its cap. Investors admitted at earlier closes are not scaled back: their commitments are signed.
Policy A, flat pro rata. Every final-close request is cut by the same factor.
Factor = capacity / final-close requests = 362 / 630 = 57.46%
Excel: =Request*Capacity/SUM(Requests)
Policy B, re-up priority. Each prior-fund LP first receives the lesser of its request and its prior commitment: 220 in total. What it asks for beyond that joins the new LPs' requests in a pro rata pool.
Pool = 362 − 220 = 142
Pool requests = re-up excess 80 + new 330 = 410
Factor = 142 / 410 = 34.63%
Excel: =MIN(Req,Prior)+(Req-MIN(Req,Prior))*Pool/SUM(PoolRequests)
Policy C, minimum ticket. Under policy B two new LPs fall below $10m: one asked for 20 and gets 6.9, one asked for 10 and gets 3.5. If the policy raises them to the minimum rather than dropping them, they take 20 from the pool and everyone else in it is rescaled: (142 − 20) / 380 = 32.11 per cent.
| LP | Request | Prior fund | A: flat pro rata | B: re-up priority | C: B with minimum |
|---|---|---|---|---|---|
| Re-up 1 | 120 | 100 | 69.0 | 106.9 | 106.4 |
| Re-up 2 | 80 | 60 | 46.0 | 66.9 | 66.4 |
| Re-up 3 | 100 | 60 | 57.5 | 73.9 | 72.8 |
| New 1 | 150 | 86.2 | 52.0 | 48.2 | |
| New 2 | 100 | 57.5 | 34.6 | 32.1 | |
| New 3 | 50 | 28.7 | 17.3 | 16.1 | |
| New 4 | 20 | 11.5 | 6.9 | 10.0 | |
| New 5 | 10 | 5.7 | 3.5 | 10.0 | |
| Total | 630 | 220 | 362.0 | 362.0 | 362.0 |
The policies move real money between the two groups. Under flat pro rata the re-ups receive 172.4 of the 362; under re-up priority they receive 247.7. Each column adds to the capacity, which is the first check on any allocation spreadsheet.
| Scenario | Pool | Factor | New 1 receives |
|---|---|---|---|
| New-LP demand 200 | 142 | 50.7% | 76.1 |
| New-LP demand 330 (base) | 142 | 34.6% | 52.0 |
| New-LP demand 450 | 142 | 26.8% | 40.2 |
| New-LP demand 600 | 142 | 20.9% | 31.3 |
| Hard cap raised to 950 | 192 | 46.8% | 70.2 |
| Hard cap raised to 1,000 | 242 | 59.0% | 88.5 |
Raising the cap is the obvious release valve and the one the LPAC and existing LPs are most likely to resist, because a larger fund deploys the same strategy with more money. Every 50 of extra cap lifts the pool factor by about twelve points here.
Scaling back on requested amounts without a check on the requests. Once LPs expect a cut, a new LP that wants 50 at a 34.63 per cent factor asks for 144.4. If all five new LPs gross up that way, their requests rise to 953, the pool factor drops to 13.75 per cent, and their total allocation rises from 114.3 to 131.0. The extra 16.7 comes out of the re-ups' excess requests, the LPs who asked honestly. The defences are to scale on soft-circled amounts recorded before oversubscription was known, cap each request at a multiple of the original indication, or allocate the pool by tiers rather than pure pro rata. The probability-weighted view of those soft circles is set out in the fundraising pipeline calculation, and the re-up arithmetic for the next fund in the re-up rate a successor fund needs.
The earlier closes carried 520 of the 900, or 57.8 per cent of the final fund, and were never cut. The strongest incentive in an oversubscribed raise is to be in an early close; say so in the allocation policy rather than leaving LPs to work it out at the final close.
The book's working documents, including the fundraising tracker, are in the free companion files.
Fix capacity first, then priority, then the pro rata base, then the minimum ticket. On the worked fund that sequence turns 630 of requests into 362 of allocations: prior commitments honoured in full and new LPs at 34.63 per cent, or 32.11 per cent with the minimum applied.
Usually, up to their commitment to the prior fund, though it is a policy choice, not a rule. In the worked case re-ups asking for 300 against 220 of prior commitments receive the 220 in full and their excess 80 is pooled with new LPs' 330 at 34.63 per cent, giving re-ups 247.7 of the 362 available instead of 172.4 under flat pro rata.
They can fall below the minimum commitment. The policy must say whether they are dropped or raised to the minimum. Raising two tickets of 6.9 and 3.5 to the $10m minimum takes 20 out of a 142 pool and cuts everyone else in it from 34.63 to 32.11 per cent.
To end up with the amount they want after the cut: at a 34.63 per cent factor an LP wanting 50 asks for 144.4. If all new LPs gross up, the factor falls to 13.75 per cent and their allocation rises from 114.3 to 131.0, taken from LPs who asked honestly. Scaling on soft circles recorded earlier prevents it.
This article is one calculation from Private Equity Investor Relations. 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.
Get the book on Amazon →Free companion files
Also on Amazon UK · Amazon Germany · Amazon France · Amazon Canada
Reading guide: private equity and private markets → · All 1340 articles →
If this book helped, or didn’t, a few lines on Amazon are worth more than they look: they are what the next reader goes on. Write a review. The workbook stays free either way.