It can, and this one did. Kelvinside Ventures Fund III drew 151,970,000 against a 150,000,000 commitment — an excess of 1,970,000, or 1.3133 per cent. No limited partner was asked for more than it signed. The fund took 1,970,000 of realisation proceeds, returned them to the partnership instead of distributing them, and invested them again against the same commitment. Invested capital exceeds investable capital by exactly the same 1,970,000, because the calls are the investments plus the fees.
Where the extra 1,970,000 comes from
Two lines in the fund's own accounts break limits a reader would assume were hard. The commitment was 150,000,000. Fees over ten years took 21,470,000, leaving 128,530,000 of investable capital. The fund invested 130,500,000 and called 151,970,000.
Line
Amount
Limited partner commitments
150,000,000
Management fees over ten years
21,470,000
Investable capital
128,530,000
Capital actually invested
130,500,000
Total called over ten years
151,970,000
Kelvinside Ventures Fund III, whole life. The two excesses are the same 1,970,000.
Invested capital exceeds investable capital by 1,970,000. Called capital exceeds the commitment by 1,970,000. That is not a coincidence. The calls are the investments plus the fees — 130,500,000 plus 21,470,000 — so any excess investment shows up pound for pound as an excess call.
The clause is recycling. Nearly every limited partnership agreement lets the manager take proceeds from a realisation, return them to the partnership rather than distribute them, and invest them again against the same commitment. Nobody has agreed to fund more than 150,000,000 of their own money. What has been agreed is that money already sent, once returned by a company, can go back out before it comes home.
Only the failures arrive in time to be recycled
Recycling can only use cash that has actually come back, and on this fund there is very little of it early.
Exit year
Companies
Cost
Proceeds
Year three
3
4,500,000
0
Year four
5
9,000,000
0
Year five
5
12,500,000
560,000
Year six
4
14,000,000
3,840,000
First six years
13
40,000,000
4,400,000
A multiple of 0.1100x on more than a quarter of the capital the fund deployed.
That schedule settles a question the report does not address. By the end of year five, the conventional close of the investment period, the fund had received 560,000 in total. It recycled 1,970,000. The money did not exist by the end of year five, so the recycling window in this agreement runs past the investment period and into at least year six, when three companies returned 2,550,000, 1,025,000 and 265,000. Against the 4,400,000 available by then, the 1,970,000 recycled is 44.7727 per cent. The manager put back less than half of what it could have.
None of that 4,400,000 came from a success. Aldwyn, which returned 198,000,000, exited in year nine. Winners in a venture fund exit late, because the length of the compounding is what makes them winners. The exits that arrive early enough to be recycled are the failures being sold for whatever the assets fetch, so a fund's capacity to recycle is manufactured almost entirely by the speed with which it disposes of its losers.
What it does to the multiple
The effect is upward, and it is small. Gross realisations of 348,975,000 on a 150,000,000 commitment are 2.3265x. Run the arithmetic the way a committee usually runs it, without knowing about recycling: take the gross multiple on invested capital, 2.6741x, and scale it by the share of the commitment that survives fees, 128,530,000 divided by 150,000,000, or 0.856867. That gives 2.2913x. The shortcut is 0.0352 turn light, and it will be light on every recycling fund.
The direct route agrees. The recycled 1,970,000, earning the portfolio's 2.6741x, produces 5,268,977 of gross realisations, which on a 150,000,000 commitment is 0.0351 turn. The 0.0001 between the two routes is rounding in the multiple, nothing more.
The purpose of the clause is legitimate. Fees remove 21,470,000, so the capital left to invest returns the whole commitment only at 150,000,000 divided by 128,530,000, or 1.1670x. Putting 1,970,000 back to work restores 9.1756 per cent of that fee drag: on the 130,500,000 actually at work the break-even is 1.1494x, which is 0.0176 turn lower. The same money goes into companies twice instead of paying for a round trip through a distribution account.
The limited partner sits on the other side of it. Distributions of 309,180,000 against the 150,000,000 committed are 2.0612x; against the 151,970,000 actually paid over they are 2.0345x, a difference of 0.0267 turn. The carried interest hurdle does not follow the cash either: the whole-of-fund calculation returns the commitment, 150,000,000, not the 151,970,000 called, so the manager takes 20.00 per cent from a point at which the limited partner is still 1,970,000 out of pocket. That drafting is worth 394,000 against 39,795,000 of total carried interest. And the money is out for longer, which a multiple cannot see and an internal rate of return can.
The line to add before signing
Alongside commitment, fee load, investable capital and break-even multiple, a subscription paper should carry a maximum call: the commitment plus whatever the recycling cap allows. Kelvinside recycled 1.3133 per cent of its commitment, so its cap is at least that and very likely far higher. Caps of ten, twenty or twenty-five per cent are common, and a fund at a twenty per cent cap could call 180,000,000 against a 150,000,000 signature. That is a different liquidity profile from the one on the subscription document.
What is the recycling cap, and is it stated on commitment or on total calls?
Over what window — the investment period, a stated extension, or the whole life?
Does it extend to gains, or only to the return of cost?
What was actually called against commitment in the last two funds?
The last question converts a contractual maximum into observed practice. A manager who has never called more than 102 per cent of commitment is saying something different from one who has called 118 per cent twice. And when a multiple on commitment will not reconcile to the gross multiple scaled by investable capital, the gap is not an error in either figure. Here it is 0.0352 turn, it points in the manager's favour, and it is the recycling clause showing up in the only place it is ever visible.
The workbooks behind this article
Every figure above is a live formula in the free companion files for
Venture Capital. Each workbook ends with a Checks sheet
setting the printed figure beside the computed one. No account and no email address.
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