June 2026
Does your LPA clearly set out how netted-off distributions should work?
A surprisingly common issue can arise when a fund makes a distribution but retains part of the proceeds to cover management fees or other expenses. At first glance, the process seems straightforward. However, problems emerge when investors are subject to different fee arrangements. Some LPs may benefit from discounted management fees, while others may be entirely exempt.
A common mistake for GPs is to deduct the total management fees payable from the gross distribution amount before allocating the remaining proceeds across investors. In some cases, the wording of the LPA may even appear to support this approach. For example, distributable proceeds may be defined as investment income less fees, with those proceeds then distributed according to each investor’s sharing percentage.
The difficulty is that applying this methodology without considering the underlying economics can produce inaccurate outcomes. Investors with lower fees, or no fees at all, effectively end up contributing more than they should towards the fund’s expenses.
In practice, the intended outcome is almost always different. Gross distributions should first be allocated to investors based on the relevant sharing percentages. Only then should management fees and other expenses be charged separately to each LP according to their specific fee arrangements. As those arrangements often vary between investors, the expense allocation will rarely mirror the distribution allocation.
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What if the fund has already been doing it incorrectly?
If expenses have historically been netted off before distributions were allocated, the consequences can build up over time. The challenge becomes even greater where recallable distributions are involved, as any errors may have flowed through subsequent drawdown calculations, investment allocations and capital account balances.
There can also be other knock-on effects. If investors have received distributions that differ from what they should have received, the amount of carried interest or preferred return owed may also be affected.
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The good news is that these issues can be corrected. The rather less good news is that unwinding the impact can be a detailed and time-consuming exercise, particularly in funds with along operating history or complex distribution activity.
How Seneschal can help
The most effective solution is to identify potential ambiguities before the fund becomes operational. A thorough onboarding process, including a detailed review of the LPA and comprehensive fund modelling, can help clarify how distributions and expenses should be treated from the outset. Getting this right on day one can prevent significant operational challenges later. For funds that have already encountered this issue, expert analysis is often needed to quantify the impact and implement a correction that is fair to all investors. Our team at Seneschal has extensive experience identifying these allocation issues, interpreting the underlying fund documentation and helping managers implement practical solutions. While these situations can be complex, they can and should be resolved.
Contact:
Barry Carroll, Founder & Group CEO
+447448949819
barry@theseneschal.com
