Equalisation
The adjustment that puts later investors on the same footing as those who joined at the first close.
Investors who join at a later close pay their share of fees back to the start plus interest, so that everyone shares the fund's economics evenly. The payments go to the earlier investors and the fund.
Equalisation payments normally cover the late investor's share of capital already called for investments and fees, plus an interest charge for the time it was not invested. The interest rate is set in the LPA, often a fixed rate in the region of 6 to 8 percent or a rate based on a bank's prime rate.
Earlier LPs receive back the excess capital they funded, plus the interest, in effect being repaid for carrying the late investor's share. The process is administered by the fund administrator at each subsequent close.
Worked example
A fund held its first close on 1 January and had called 15 percent of commitments by 1 July, when a new LP commits $10M at a second close. The new LP pays $1.5M, its 15 percent share of capital already called, plus interest at 8 percent a year for six months, $60,000. The $1.5M is used to rebalance contributions among LPs, and the interest goes to the earlier investors.
Common questions about equalisation
Why do later investors pay equalisation interest?
To compensate earlier LPs for funding investments and fees on their behalf. Without it, waiting to commit would be cheaper than committing early.
Does equalisation interest go to the GP?
Usually not. It is paid to the earlier investors or to the fund, depending on the LPA. The GP receives only its share as an investor through its own commitment.