Equalization helps ensure investors receive appropriate compensation based on when they enter a fund, maintaining fairness across the investor base.
Understanding equalization
Many private markets funds raise capital from investors over a period of months or years. Often during that time, funds are making investments and potentially generating returns.
Equalization acts as an interest expense that is paid by later investors in a fund to earlier investors, helping to compensate earlier investors for longer time in the fund.
How does equalization work?
After the first monthly closing, all subsequent investors are subject to a one-time equalization expense.
For most funds, the equalization expense is maybe an 8% annualized interest rate, or 0.67% per month on the time between their closing and the first fund closing. For example, if you invest two months after the first closing, your one time equalization expense would be 1.33%.
For certain funds where the underlying exposure is to loans with a contractual interest rate, the equalization expense may be equal to the underlying loans’ interest rate.
Then, each investor will be allocated their share of the equalization expense — called a “true up” — in any monthly closing after their own.
Equalization in Action
Consider the following illustrative example where three investors enter a fund across three months.
