Equalisation on a staggered close is a price, not an adjustment.

A fund with one close has one register and one set of positions, and every holder's share of each is its commitment over the total. A fund with several closes has, at each later close, a register that funded positions before the new holders arrived, and the new holders arrive into a fund whose positions have moved. Equalisation is the mechanism that puts a later holder where it would have been had it been admitted at the first close: it pays its share of the drawn capital, plus an amount for the time the earlier holders' money was at work, and the earlier holders receive the payment as a return of capital and the time amount as income. Managers describe it as an adjustment. It is a purchase. The later holder buys, from the earlier holders, a share of positions the earlier holders funded, and the price of that purchase is set by the document, at cost plus a rate, or at value, or at something between, and the choice of price is the choice of who gains from the positions' movement between closes.

This note sets out the staggered close and what it creates, the three prices, the rate as a price, the valuation as a price, the direction of the transfer, the treatment at the fund and at each holder, the drawdown mechanics that deliver it, the lender's reading, the interaction with classes and with the anchor's letter, a comparison, a worked close as a type, cases, what each party holds, the sequence, questions, terms and what to read.

What the staggered close creates

At the first close the fund has holders and no positions. It draws, invests, and by the second close has positions with a cost and a value. The second-close holders commit to the same fund and expect the same share of the same positions, per unit of commitment, as the first-close holders. The fund can deliver that only by having the second-close holders pay into the fund an amount that, once in, leaves every holder's contributed capital in proportion to commitment. The payment goes to the fund; the fund returns to the first-close holders the part of their contributions that now exceeds their proportion; and the first-close holders have, in substance, sold part of their positions to the second-close holders at the payment's price.

The three prices

The first price is cost plus a rate: the later holder pays its share of drawn capital at cost, plus a rate on that share for the period from each drawdown to the later close. The rate is the document's and it is a price, because it fixes what the earlier holders receive for having funded first regardless of what the positions did. If the positions rose, the later holder bought at cost plus the rate and gained the rise; if they fell, the later holder bought above value and the earlier holders gained.

The second price is value: the later holder pays its share of the positions at their valuation at the later close. The earlier holders receive the rise and bear the fall. The valuation is the document's, and the valuation method is the price.

The third price is cost plus a rate to a cap at value, or value with a floor at cost, and each variant is a price that assigns the movement between closes partly to each side.

The rate as a price

The rate is usually a stated percentage per annum, simple, on each drawdown from its date to the later close. It is called an interest equalisation charge or a late-entry charge, and it is paid by the later holder to the earlier holders through the fund. Its level is the document's, and a high rate makes the earlier holders better off when positions are flat, the later holder better off when they rose steeply. The rate is a price because it does not track the positions; it is the return the earlier holders are promised for having been early, and a manager that sets it sets what an early commitment is worth.

The valuation as a price

Value-based equalisation needs a valuation at the later close, of positions that may be months old and illiquid, by a method the document fixes and a valuer the governance appoints. The valuation is the price, and a valuation that is the manager's own, on positions the manager bought, sets the price at which the manager's first-close investors sell to its second-close investors. Independence of the valuation is the question, and the governance that appoints the valuer for the annual valuation appoints it for the equalisation valuation.

Why managers call it an adjustment

The word adjustment suggests a correction to an error, as though the later holder's position were wrong and equalisation set it right. The word carries no price and no counterparty, and that is its use: it lets the manager describe the later close as administrative, and it lets the memorandum carry the provision in a paragraph the later holders do not read. A purchase has a price and a seller, and a later holder that reads equalisation as a purchase asks the price and whether the seller set it. The manager's description does not change the substance, and the regulator, the valuer and the anchor's counsel read the substance.

The description matters for another reason. A fund that treats equalisation as an adjustment treats the earlier holders' receipt as a correction too, and the earlier holders' own accounts then carry a return of capital and a receipt of income without a sale, which is what their advisers need to know for their treatment. A fund that treats it as a purchase says what was bought, from whom and at what price, and each holder's treatment follows.

The period and the rate's arithmetic

The rate runs from each drawdown's date to the later close, on the later holder's share of that drawdown. A fund that drew three times before the second close computes three periods, and the later holder's rate amount is the sum. The arithmetic is simple and the computation is disclosed, because a later holder that can verify the sum does not dispute it and one that cannot does. The administrator's notice sets out each drawdown, its date, the later holder's share, the period and the rate amount, and the total.

The rate is simple, not compounded, in most documents, and the document says so; a rate that compounds over a long gap between closes is a different price. The rate runs to the later close date, not to the date the later holder pays, and a later holder that pays late pays default interest under the default provisions, which is a different clause.

The gap between closes

A gap of weeks between closes makes equalisation a small number; a gap of a year on a fund that has drawn half its commitments makes it a large one. The document fixes the final close date, usually within a period from the first close, and the manager that extends it extends the gap and the equalisation. A later holder admitted eighteen months after the first close, into a fund that has drawn half and whose positions have moved, is buying a portfolio, and the price question is sharp. Managers that expect a long raise choose cost plus a rate because a valuation at each close is a burden; managers that expect a short raise can afford either.

The direction

Cost plus a rate transfers the positions' movement to the later holder: it buys at cost and takes the rise or fall, paying the earlier holders a fixed return for their time. Value transfers the movement to the earlier holders: they sell at value, keep the rise and bear the fall, and the later holder starts at the current mark. A manager chooses by asking which side it wants to favour and which side will be told. Cost plus a rate favours the later holder when positions rose; value favours the earlier holders. The first-close anchor, which negotiated its package, reads the equalisation provision as part of the package, and a manager that changed it between closes changed the anchor's terms.

The treatment at the fund and at each holder

At the fund, the equalisation payment in is a contribution from the later holder; the payment out to the earlier holders is a return of contributed capital to the extent of the cost share and income to the extent of the rate or the gain. The earlier holders' commitment is restored by the capital returned, so that the returned amount is available to be drawn again, and the document says so. The administrator records each holder's contributed capital, returned capital and remaining commitment after the equalisation, and the hurdle clock for each holder runs on its own contributions from their dates.

At each holder, the rate received is income and the capital returned is capital, and the later holder's rate paid is part of its cost of the positions. A holder's own tax position determines how it treats each, and the document's characterisation of the rate as interest or as a price component is read by each holder's adviser.

The drawdown mechanics

The later close is delivered by a drawdown notice to the later holders for their equalisation amount, computed by the administrator on the earlier drawdowns, and a distribution notice to the earlier holders for the amount returned. The two are netted at the fund. The notices carry the computation, so that each holder can verify its share. A fund that delivers equalisation as a single number on the notice without the computation is a fund whose later holders take the administrator's word, and the anchor's committee asks for the computation.

The position sold between closes

A position bought after the first close and sold before the second has produced proceeds, and the later holders did not fund it. The document says whether the later holders share in the realised gain, by equalising on the proceeds as if they were a position, or whether the gain is the earlier holders' alone. Cost plus a rate on a realised position gives the later holders the gain at the rate's price; excluding realised positions keeps it with the earlier holders. Either is a choice, and a document that does not make it leaves the administrator to make it at the second close, which the anchor's committee will not accept.

The later holder's excuse

A later holder that may not hold a position the fund already has, for a regulatory or policy reason, is excused from it, and its equalisation runs on the rest. The excuse is in its letter, as a reallocation among the other holders, and the administrator runs a computation that excludes the excused position from that holder's share. The excuse interacts with the lender's clause, because an excused holder's obligation to fund the rest is what the lender counts, and the letter preserves it.

The memorandum's paragraph

The memorandum describes equalisation in a paragraph each later holder's counsel reads: the price, the rate, the restoration, the proceeds treatment and the per-class mechanics. A paragraph that says the later holders will be equalised on terms the manager determines is a paragraph that sets no price, and the later holders' counsel asks for the document's provision. A paragraph that states the price and refers to the computation in the notices is the disclosure the regime expects and the later holders need.

The lender's reading

A capital-call lender reads the equalisation provision for the restoration of commitment: capital returned to earlier holders and available to be drawn again is commitment the lender can count, and the document's restoration clause is what makes it so. The lender also reads the later holders' commitments as added to the base at the later close, with the equalisation drawdown as the first call on them, and confirms that the later holders' subscription documents bind them to the lender's clause.

Classes and the anchor's letter

Equalisation runs within a class, because a class has its own economics and its own drawn capital; a later holder admitted to a size class equalises against the earlier holders of that class. A fund with classes runs one equalisation per class. The anchor's letter may address equalisation directly, fixing the rate or the method for the anchor's own benefit, and a most-favoured-nation clause in a later holder's letter may reach the anchor's equalisation term; the exclusions are drafted for it.

By price · by effect	The later holder pays	The earlier holders receive	Who gains the rise	Who bears the fall
Cost plus a rate	Cost share plus the rate	Capital back plus the rate	The later holder	The later holder
Value	Value share	Capital back plus the gain, or less the loss	The earlier holders	The earlier holders
Cost plus a rate, capped at value	The lower of the two	The lower of the two	Shared by the cap	The earlier holders, to the cap
Value with a floor at cost	The higher of the two	The higher of the two	The earlier holders	The later holder, to the floor
No equalisation, later holders buy new positions only	Nothing for the old	Nothing	Each holder on its own positions	Each holder on its own positions

A close, as a type

A fund holds a first close with an anchor and two institutions, draws a third of commitments and buys two positions. Six months on, a second close admits a sovereign and two family offices. The document provides cost plus a stated rate. The administrator computes each later holder's share of the two drawdowns at cost, adds the rate from each drawdown date, and issues a drawdown notice with the computation. The earlier holders receive a distribution notice returning the capital that now exceeds their proportion, with the rate as income, and their commitments are restored by the capital returned. The lender adds the later holders' commitments to the base and counts the restored commitment. The anchor's committee reads the computation. The later holders hold their proportion of both positions at cost plus the rate; the positions' rise since the first close is theirs.

A timeline, as a type

At the first close the document fixes cost plus a stated simple rate, with restoration and with realised proceeds shared. The fund draws at two months and at five months and buys two positions. At nine months the second close admits three holders; the administrator computes each holder's share of both drawdowns, the rate for seven and four months respectively, and issues drawdown notices with the computation; the earlier holders receive distribution notices returning the excess capital and the rate as income; the lender adds the new commitments to the base and counts the restored commitment. At fourteen months the final close admits one holder, and the computation runs on three drawdowns and two closes of restored capital. The administrator's register carries, for each holder, contributions by date, returns by date and remaining commitment, and each hurdle clock runs on them. At the first distribution, in year four, the waterfall runs per holder on the clocks the register kept.

The structure paper's page

The structure paper carries a page on closes: the expected number and timing, the price chosen and why, the rate's level and basis, the restoration clause, the treatment of realised proceeds and of positions sold between closes, the per-class mechanics, the valuation's source where the price is value, and the form of the notices. The page is written before the first close because the anchor negotiates against it, and it is the page the administrator builds its computation from.

The onshore vehicles between closes

A fund that has, between closes, acquired onshore vehicles holding positions in a register jurisdiction has positions whose value moved with the onshore market and whose transfer cost is set onshore. Equalisation at the fund does not transfer anything onshore; the later holders' exposure to the onshore positions arises through their units in the fund, and the onshore registers are untouched. But the valuation of those positions, where the price is value, is an onshore valuation, and the later holders' counsel reads the valuer's standing in that jurisdiction.

The second fund's reading of the first

A manager raising its second fund has a first fund whose closes were staggered and whose equalisation was run, and prospective holders in the second fund read the first fund's computation as evidence of how the manager treats early and late money. A first fund in which the later holders bought rising positions at cost, because the document was silent, has early investors who remember it; a first fund whose price was fixed and whose computation was disclosed has a track record the second fund's anchor can read. The equalisation provision in the second fund is drafted with that reading in view, and a manager that changed the price between funds is asked why.

Four cases, as types

A document is silent on equalisation and the manager admits a second close on cost. The second-close holders buy positions that rose at cost, the first-close holders funded the rise for nothing, and the anchor's counsel reads the document for a term that does not exist.

A document provides value-based equalisation and the manager values its own positions at the second close. The second-close holders pay the manager's mark; the mark is read at the first annual valuation by the independent valuer at a lower figure; the second-close holders ask who set the price.

A document provides cost plus a rate, the administrator computes it, and the restoration clause is missing. The first-close holders' returned capital is not re-drawable, the lender's base drops, and the fund's capacity is short by the amount returned.

A document provides cost plus a rate with restoration, the administrator issues notices with the computation, the lender counts the restored commitment, and the anchor's letter addressed the method at the first close. The second close is an arithmetic event.

What each party holds

The manager holds the choice of price, made at the document and not between closes.

Counsel holds the equalisation provision, the restoration clause and the interaction with classes and letters.

The administrator holds the computation, the notices and the record of each holder's contributed, returned and remaining amounts.

The valuer holds the valuation where the price is value.

The committee holds the reading of the computation.

The lender holds the restoration clause and the later holders' accession to its clause.

Where it surfaces

It surfaces at the second close, when the later holders' counsel reads the equalisation provision and asks the price. It surfaces at the earlier holders, when their distribution notice arrives and their advisers ask what was sold. It surfaces at the administrator, which runs the computation and finds the document did not say whether the rate compounds or whether realised proceeds are shared. It surfaces at the lender, when the returned capital is not restored and the base drops. It surfaces at the first annual valuation, when a value-based equalisation price is read against an independent mark. And it surfaces at the hurdle, years on, when each holder's clock is found to have started on a date the equalisation did not record.

The cost of getting it wrong

A document silent on the price has admitted a later close at a price nobody set, and the earlier holders, who funded the positions' movement, have a claim against a manager that gave it away. A value-based price set by the manager's own mark is a related-party price between two sets of the manager's investors, and the regime reads it as such. A missing restoration clause costs the fund its re-drawable capital and the lender its base. An undisclosed computation costs the manager the later holders' confidence at the first event of the fund's life. Each is a term the document could have carried, and the cost of carrying it is a paragraph and a computation.

The hurdle clock and equalisation

Each holder's preferred return runs on its own contributed capital from the dates of contribution. A later holder's equalisation payment is a contribution on the later close date, and its hurdle runs from then; the earlier holders' hurdle ran from their drawdown dates on the amounts drawn, and the capital returned to them at equalisation reduces the amount on which their hurdle runs from that date. The administrator keeps each holder's clock. A document that runs one hurdle for the fund on the fund's aggregate contributions, ignoring the per-holder dates, has given the later holders a hurdle that started before they paid, and the earlier holders have paid for it.

The committee's reading

The anchor's committee reads the equalisation computation at each later close, because the anchor is the seller and the price is its economics. It asks for the computation, the drawdown dates and shares, the rate and its period, and, where the price is value, the valuation and who made it. A manager that sends the computation unasked has a committee that reads it once; a manager that sends a number has a committee that asks for the rest.

The sequence

1. The price is fixed in the document at the first close: cost plus a rate, value or a variant, with the rate's level and the valuation's method.
2. The restoration clause is drafted, so that capital returned is re-drawable.
3. The equalisation runs per class, and the anchor's letter addresses it within the exclusion set.
4. At each later close the administrator computes, the notices carry the computation, and the fund nets.
5. The lender adds the later holders to the base and counts the restored commitment.
6. Each holder's hurdle clock runs on its own contributions from their dates.

Questions a manager asks

Which price is usual. Cost plus a rate is the common form for illiquid strategies, because it needs no valuation; value is used where positions are marked regularly.

What rate. The document's, set at the first close; a rate above the fund's expected return favours the earlier holders, a rate below favours the later.

Can the later holders decline positions. Not within equalisation; a holder that wants to exclude a position negotiates an excuse, and the equalisation runs on the rest.

Does the rate count toward the hurdle. For the earlier holders it is income received and the document says whether it reduces the amount on which the hurdle runs; for the later holders it is part of their contributed capital.

What if the later close is after a position was sold. The later holders equalise on positions held and on proceeds received, and the document says whether realised gains are shared.

Is the rate paid to the manager. No; it is paid through the fund to the earlier holders, and a document that routes it to the manager has changed the manager's economics.

Terms used

Staggered close: the admission of holders at more than one date.

Equalisation: the payment that puts a later holder in the position of a first-close holder.

Equalisation rate: the stated rate paid by a later holder for the period its share was funded by others.

Restoration: the re-crediting of returned capital to the earlier holders' undrawn commitment.

Value-based equalisation: equalisation at the positions' valuation at the later close.

Drawdown notice: the call on the later holders for their equalisation amount, with the computation.

What to read

The constitution's equalisation and restoration provisions; the anchor's letter on equalisation; the administrator's computation; the valuation policy where the price is value; the facility's treatment of restored commitment. On this site, the economics room under Structures and the worked structure on seed terms.