Equalisation is a mechanism that adjusts the economics between investors who commit to a fund at different closes, ensuring later investors do not gain an unfair advantage by avoiding early investment exposure or management fees.
How equalisation works
When a fund accepts commitments at multiple closes, later investors haven't participated in investments made between first close and their entry date. Without equalisation, these later investors would effectively get a "free look" at the fund's early performance before committing. Equalisation typically requires later investors to make an additional payment beyond their capital commitment, compensating earlier investors for management fees paid and investments made before the later investors joined.
Implementation challenges
Calculating equalisation correctly requires detailed tracking of capital calls, management fees and investment timing across different investor cohorts. The specific methodology should be clearly defined in the Limited Partnership Agreement to avoid disputes. Fund accounting systems can automate equalisation calculations according to LPA terms, ensuring accurate adjustments across investor cohorts. For fund managers focused on operational excellence, handling equalisation transparently reinforces trust with both early and late investors.
Do later investors pay more?
Later investors usually make an additional equalisation payment. This compensates earlier investors for management fees and investments made before the later investors joined. The goal is to ensure all investors participate on equal economic terms.
Is equalisation interest taxable?
Tax treatment depends on the jurisdiction and investor structure. Equalisation payments or interest may have tax consequences. Investors should refer to fund documentation and seek tax advice where necessary.
