Recycling is told at subscription or it is not done.

A fund that sells a position in year two has proceeds, and two things it can do with them. It can distribute them, which returns capital to the register and reduces the fund's invested base. Or it can reinvest them in the next acquisition, which keeps the base invested and defers the distribution. Managers prefer the second, because a fund that distributes early is a fund that has shrunk before its programme has run, and because the manager's charge after the investment period is calculated on invested capital. Registers prefer to know which, because a register that expected cash in year two and received a new acquisition has been told something different from what it subscribed to, and a register that subscribed to recycling knows when its money comes back. The constitution settles it in four terms, and the memorandum carries them on its first page or the recycling is a surprise.

This note sets out what recycling is and why managers want it, the four terms the constitution settles, where recycling interacts with the waterfall, the lender, the tier and the term, the recycling of capital versus gain, the land platform's admission policy as recycling, the register's own modelling, the committee's role, a comparison, a worked policy as a type, cases, what each party holds, the sequence, questions, terms and what to read.

What it is and why managers want it

Recycling is the reinvestment of proceeds from a realisation into new investments, rather than their distribution to holders. A fund with a five-year investment period and a ten-year term that sells a position in year three has seven years of term left and capital returned; recycling lets it use that capital again rather than calling more from the register or leaving it idle. Managers want it because it increases the capital actually invested over the fund's life relative to commitments, which increases the fund's total gain and the manager's share of it; because it lets the fund replace a position sold early with one that fits the programme; and because it keeps the invested base, on which the manager's charge is calculated after the investment period, from shrinking with every sale. Each reason is legitimate and each is the register's to weigh.

The four terms

Whether recycling is permitted at all. A constitution silent on it does not permit it in most readings, because a distribution of realisation proceeds is the default of a closed-ended fund, and a manager that reinvests without the power has applied the register's money to a purpose it did not authorise.

For how long. A period after final close, or the investment period, after which proceeds are distributed. Recycling after the investment period ends is an extension of the investment period by another name, and the register reads it as one.

Up to what amount. Typically the capital returned, so that the fund reinvests principal and distributes gain; some constitutions permit recycling up to commitments, so that capital called and returned may be called again; some cap it at a stated share of commitments. The amount decides how much of the register's money can be invested twice.

On what proceeds. A disposal's proceeds, or income too; proceeds of a position sold within a stated period of its acquisition, or any; proceeds from a position that failed, or only from one that succeeded. The proceeds recycled decide which of the register's returns are deferred.

Where it interacts

With the waterfall. A manager's share calculated on distributions is calculated differently when proceeds are recycled, because the hurdle runs on capital outstanding and recycled capital is outstanding again. The constitution says whether recycled amounts count as returned capital for the hurdle, whether the hurdle runs on the recycled amount from its reinvestment, and whether a deal-by-deal share crystallises on a realisation whose proceeds are recycled. A register that did not read those has a waterfall it does not understand.

With the lender. A capital-call facility's borrowing base assumes undrawn commitments, and recycling that treats returned capital as re-callable changes what the commitments are; the facility's definition of commitments and the constitution's recycling provision are read together. A net asset value facility's covenants read the invested base, which recycling keeps larger.

With the tier. Some regimes cap the reinvestment period or require its disclosure, and the tier's rules on the investment period are read for whether recycling after it is permitted.

With the term. A fund that recycles to the end of its investment period has an exit programme that starts later than the register assumed, because the last recycled position has its own programme, and the term's arithmetic carries the last reinvestment's programme rather than the first acquisition's.

Why recycling is contested

Recycling moves two things the register cares about: the timing of its cash and the base on which the manager is paid. A register that receives gain as realised and capital at the end has a return it can see arriving; one whose proceeds are reinvested has a return deferred to a fund whose last positions it has not yet seen. And a manager paid on invested capital after the investment period has an interest in a base that does not shrink, which recycling serves. Neither interest is illegitimate, and the register's acceptance of recycling is the price of a manager that keeps the fund invested through its programme. The contest is settled by stating the terms, because a register that knows the period, the amount and the proceeds has priced them, and a register that did not know has priced the fund it was shown.

The arithmetic of invested capital

A fund with commitments of a stated size, a five-year investment period and no recycling invests its commitments once, and the capital actually at work over the fund's life averages less than the commitments, because positions are sold and proceeds distributed. With recycling to the end of the investment period up to capital returned, the same fund invests the early realisations a second time, and the capital at work averages closer to the commitments. The manager's total share of gain rises with the capital at work; the register's total gain rises too, if the second investments succeed, and its cash arrives later either way. The arithmetic is shown in the memorandum with a worked example: commitments, the period, a realisation in year two, the recycling, the distributions by year under each policy, and the manager's share under each. A register that sees the example chooses; one that does not is chosen for.

Recycling and the hurdle, read closely

The hurdle runs on capital outstanding from the date it was drawn, and recycled capital is capital the register has, in substance, been asked to leave in the fund. Three treatments exist. The recycled amount counts as returned capital for the hurdle, so that the register's hurdle on it stops at the realisation, and the reinvestment is new capital with a new hurdle from its date. The recycled amount is treated as never returned, so that the hurdle runs on it continuously from the original drawdown. Or the recycled amount counts as returned and is not re-invested for hurdle purposes at all, which is the most favourable to the register and the rarest. The constitution names one, and the worked example shows it, because the three produce different manager's shares on the same fund.

Recycling and the deal-by-deal waterfall

Under a deal-by-deal waterfall the manager's share crystallises on each realisation, and a realisation whose proceeds are recycled has crystallised a share on gain that is then reinvested; if the reinvestment fails, the clawback reaches the share. A whole-fund waterfall calculates on the fund as a whole and recycling defers everything. A register reads the waterfall's unit with the recycling policy, because recycling under deal by deal pays the manager on a position whose proceeds the register does not receive.

Where it surfaces

At the first realisation, when the register expected a distribution and received an acquisition notice.

At the hurdle calculation, when recycled capital's treatment was never stated.

At the lender's review, when returned capital was re-called against a base the facility did not define that way.

At the term's end, when the last recycled position's programme runs past it.

At the committee, asked to ratify a reinvestment the constitution did not permit.

The cost of getting it wrong

Recycling without the power costs a ratification and a register whose model is wrong by a year. Recycling without stated terms costs a waterfall dispute at the first realisation. Recycling beyond the investment period costs the term. Recycling of gain costs the register's cash flows until the fund's end. The four terms cost a paragraph each and a worked example, and a register that read them modelled the fund it holds.

Capital and gain

The cleanest recycling policy reinvests capital and distributes gain: the proceeds of a realisation are split into the capital originally invested in the position, which may be recycled, and the gain, which is distributed through the waterfall. The register receives its gains as they arise and its capital at the end, and the manager keeps the invested base. A policy that recycles gain as well has deferred the register's whole return to the fund's end, and the register reads that as a longer fund with a larger base on which the manager is paid.

The land platform's admission policy

On a land platform, recycling is the admission of later parcels from the proceeds of earlier ones, and the exposure statement's admission policy is the recycling policy: how later parcels enter, for how long, from what proceeds, within what limits. A develop-and-sell platform that sells parcels as schemes complete and reinvests in new ones for a stated period after first close, then distributes, has told the register when distributions begin; one whose admission policy is open-ended has a platform whose exit starts when the manager stops admitting.

The register's own modelling

A register models its cash flows from the fund on the recycling policy, because the timing of distributions is the timing of its own liquidity. An institutional holder with its own liabilities to match reads the policy for the year its money returns; a holder reports the fund in its own accounts on the distributions it expects. A policy stated in the memorandum is a policy the register models; one discovered at the first acquisition notice instead of a cheque is one the register re-models under protest.

The committee

The committee reads each recycling decision against the policy: within the period, within the amount, from permitted proceeds, into a position within the exposure statement. A recycling outside the policy is a matter for the committee's consent or a breach, and the committee's minute records which. Where the recycling replaces a position that failed, the committee asks why the replacement fits the policy the failed one did not.

By term · by reading	The manager's interest	The register's interest	What the constitution states
Permitted at all	Keeps the base invested	Knows whether proceeds return	Yes or no, expressly
Period	Longer	Shorter, or the investment period	A stated period after final close
Amount	Commitments	Capital returned only	Capital returned, commitments or a share
Proceeds	Any, including income	Disposals only, within a period	Which proceeds, and from which positions
Waterfall	Hurdle on recycled capital from reinvestment	Recycled capital counts as returned for the hurdle	The treatment, in terms
Lender	Re-callable commitments	Base unchanged	The facility's definition reconciled

A timeline, as a type

Month one: the manager decides on recycling for three years after final close, up to capital returned, from disposals of positions held over a year; the constitution is drafted with the four terms; the waterfall's treatment of recycled capital is stated; the facility's commitments definition is reconciled. Month three: the memorandum's first page: closed-ended, ten years, recycling for three years of capital only, gain distributed as realised; the worked example annexed. Month five: final close; the three-year period begins. Year two: a position sells; the capital is recycled into an acquisition within the exposure statement; the gain is distributed; the committee's minute records the policy met; the hurdle on the recycled capital runs from the reinvestment as the constitution stated. Year three, month five: the period ends; all proceeds thereafter are distributed. Year four: the register's model and the fund's distributions agree.

The structure paper's page

The structure paper's recycling page carries: the four terms; the waterfall's treatment of recycled capital; the facility's definition reconciled; the tier's rules on the investment period; the exposure statement's admission policy where the fund is a land platform; the worked example; and the memorandum's first-page statement. The page is the committee's test for each reinvestment and the register's model's input.

Reading recycling with the onshore registers

Gulf institutions read recycling as they read the term: a stated period and a stated amount are accepted; an open-ended power is not. The Kingdom's distributor and Kuwait's licensed person file the fund's documents with the recycling policy in them, and a policy that changes by amendment is a change to notify. A register that subscribed through the intermediaries subscribed to the policy as filed.

The successor and the recycling

A manager raising a successor while the predecessor recycles has two funds competing for the same positions, and the allocation policy between them governs which fund takes an asset a recycled proceed could fund. A recycling into a position the successor would have taken is an allocation decision the committee reads, and a recycling period that runs into the successor's investment period is a period the allocation policy must address. The two constitutions are drafted together, and a predecessor's recycling period commonly ends when the successor's investment period begins.

Recycling of income

Income, rents, interest, dividends from positions, is distributed in most closed-ended funds as it arises, after the fund's costs, and a constitution that permits income to be recycled has deferred the register's yield as well as its capital. A real estate platform that recycles rents into new parcels, or a credit fund that recycles interest into new loans, has told its register that the yield it expected quarterly is part of the invested base until the period ends. The policy says whether income is recycled, and a register that wanted yield reads the answer first.

The distributions that are not distributions

A fund that recycles sometimes distributes and re-calls in the same quarter: the proceeds are distributed to holders and a call is issued for the new acquisition, so that the register's cash flows show both and the fund's invested base is unchanged. The mechanism is a recycling by another route, with the same effect on the base and a different effect on the register's accounts, which show a distribution and a call rather than nothing. The constitution says which route the fund uses, because the register's own reporting and the facility's base read them differently, and a fund that switches between them without saying has a register whose accounts do not match the fund's.

The committee's minute

Each recycling is minuted: the realisation, its proceeds split into capital and gain, the amount recycled, the position it funded and its fit to the exposure statement, the period's remaining term, the cumulative recycled amount against the cap, and the hurdle's treatment. The minute is the register's evidence that the policy was kept and the review's evidence that the manager applied the register's money as authorised. A recycling without a minute is a reinvestment the committee did not see.

The manager's charge and the base

The manager's charge after the investment period is calculated on invested capital in most constitutions, and recycling keeps invested capital from shrinking with each realisation. A register that accepts recycling accepts that the charge base stays higher for longer, and the worked example shows the charge under each policy beside the manager's share. A manager that wants recycling for the programme's sake shows the register the charge's effect and offers, where the register asks, a step-down on recycled capital or a cap on the charge base, so that the recycling is read as investment rather than as the manager's economics.

The register's election

Some constitutions give the register an election on recycling: a holder may opt out of reinvestment of its share of a realisation and receive its proceeds, with the other holders' shares recycled and the opting holder's interest in the new position reduced accordingly. The election is expensive to administer, because each recycling then produces different percentages for different holders, and it is rare; where it exists it is drafted with the administrator in the room, because the arithmetic of a partial opt-out across a ten-year fund is the administrator's to run.

The honest version, restated

The honest version is one line in the memorandum, one clause in the constitution and one column in the model: recycling permitted for a stated period after final close, up to returned capital, from disposal proceeds only, with gain and income distributed as realised, with the hurdle's treatment named and the facility reconciled. A register that reads it knows when its money comes back. A register that does not find it in the documents learns the answer on the day it receives an acquisition notice instead of a cheque, and that day is the day the register starts reading the constitution for everything else.

Recycling and the exit test

The exit test reads the last recycled position as the fund's last exit, because it is: a parcel admitted in year three under the admission policy has its own programme and its own route out, and the term's arithmetic and the exit test's time run from it. A recycling period that ends in year three on a platform whose parcels take five years to develop and a year to sell has a last exit in year nine, and a term of ten with a margin carries it. A recycling period that runs longer has a last exit the term may not contain, and the committee that approves a late recycling approves the extension it will be asked for.

What the tier says

The centres' funds rules address the investment period and, for some tiers, the reinvestment of proceeds, and a fund's recycling provision is read against them. The rules may require the investment period to be stated and may treat reinvestment after it as a change of the fund's terms requiring the holders' consent. The onshore regimes that file the fund's documents read the policy as filed. A recycling provision drafted to the tier is one the regulator's review reads as within the fund's stated terms.

A policy, as a type

A fund with a five-year investment period and a ten-year term permits recycling for three years after final close, up to the capital returned, from the proceeds of disposals only, of positions held more than a year; gain is distributed through the waterfall as realised; recycled capital counts as returned for the hurdle and the hurdle runs on it again from reinvestment; the capital-call facility's definition of commitments excludes recycled capital; and the memorandum states all of it on its first page beside the term. The register models distributions of gain from year two and of capital from year four. In year two a position sells; the capital is recycled into a new acquisition within the policy, the gain is distributed, and the committee's minute records the recycling within the period and the amount. In year four the period ends and all proceeds are distributed.

Four cases, as types

A fund's constitution is silent on recycling. In year two the manager reinvests a realisation's proceeds in a new acquisition. A holder's counsel reads the constitution, finds no power, and the committee is asked to ratify a reinvestment the manager had no authority to make, with the holder's own cash-flow model now wrong by a year.

A fund permits recycling up to commitments for the whole term. The register's money is invested twice and three times; distributions begin in year eight; the manager's charge on invested capital is paid on a base that never shrank; and the register, which read "closed-ended, ten years", learns what that meant in year seven.

A fund permits recycling of gain as well as capital. The register receives nothing until year six; a holder with liabilities to match in year four has a position it cannot fund from the fund it modelled.

A fund states the four terms on the memorandum's first page, recycles capital for a stated period, distributes gain as realised, reconciles the waterfall and the facility, and the register models its cash flows on the policy and receives them as modelled.

What each party holds

The manager holds the recycling power it asked for, stated in four terms, and the discipline of staying within them.

Counsel holds the constitution's provision and its reconciliation with the waterfall, the facility and the tier.

The committee holds the reading of each recycling against the policy.

The lender holds the facility's definition of commitments, reconciled with the provision.

The administrator holds the calculation of recycled capital and the hurdle on it.

The register holds the first page, and its own cash-flow model built on it.

The sequence

1. The manager decides whether it wants recycling and in what terms, before the constitution is drafted.
2. The four terms are written into the constitution expressly: whether, for how long, up to what, from what.
3. The waterfall's treatment of recycled capital and the hurdle is drafted in terms.
4. The capital-call facility's definition of commitments is reconciled with the provision.
5. The memorandum states the policy on its first page beside the term.
6. The committee reads each recycling against the policy and minutes it.

Questions a manager asks

Is recycling standard. It is common within the investment period up to capital returned, and a register accepts it when it is stated; what is not standard is recycling discovered.

Does recycling lengthen the term. It lengthens the exit programme by the last reinvestment's programme, and the term's arithmetic carries it.

Can the manager recycle into a position outside the exposure statement. No. Recycling is a source of capital, not a change of policy; the position must fit the statement.

What does the lender think. A capital-call lender reads the facility's commitments definition against the provision, and a provision that treats returned capital as re-callable is a change to the base the lender agreed or did not.

What about recycling a failed position's proceeds. The policy says whether; a register reads recycling of a failure's proceeds as a second chance it did not grant.

Does the land platform recycle. Its admission policy is its recycling policy, stated in the exposure statement with a period and limits; the portfolio room on the Land door reads it.

Terms used

Recycling: the reinvestment of realisation proceeds rather than their distribution.

Recycling period: the stated time after final close, or the investment period, within which recycling is permitted.

Recycled capital: proceeds reinvested, counted as returned or not for the hurdle as the constitution states.

Admission policy: a land platform's rules on how later parcels enter, which is its recycling policy.

Capital and gain: the split of a realisation's proceeds into the amount invested and the excess.

First page: the memorandum's statement of the form, the term and the recycling policy together.

What to read

The constitution's recycling, distribution, waterfall and investment-period provisions; the tier's rules on the investment period; the capital-call facility's definition of commitments; the exposure statement's admission policy; the memorandum's first page. On this site, the liquidity and economics rooms under Structures and the portfolio room on the Land door.