Equalization Interest Calculations at Subsequent Closes: The Math Behind Making Early LPs Whole

When a private equity fund admits new investors at a subsequent close, finance teams face one of the more calculation-intensive moments in fund accounting. Equalization interest compensates early investors for having their capital tied up longer, and for bearing the blind pool risk that later investors largely avoided.

Why Does Equalization Interest Exist?

Early limited partners commit capital without knowing the fund's eventual investments. By the time a second or third close occurs, the portfolio has often begun to take shape. Equalization interest addresses this imbalance by requiring subsequent investors to compensate initial LPs for two things:

• The time value of capital already deployed

• The reduced uncertainty later investors enjoy when committing

The interest rate typically mirrors the fund's preferred return (often 8%) or references a market rate plus basis points, as specified in the limited partnership agreement.

How Is the Calculation Structured?

The basic formula applies an interest rate to the equalization amount over the time elapsed between capital deployment and the subsequent close:

• Principal: The new investor's pro rata share of capital previously called

• Rate: Usually 8% annually, though LPAs vary (some use SOFR plus a spread)

• Time: Days between the original drawdown date and the subsequent close

Consider a $200M fund that called $40M at its January first close. A new investor joining at the April second close with a $20M commitment (10% of the now-$200M fund) owes their proportional share of that prior call, $4M, plus equalization interest on that amount for approximately 90 days.

At an 8% annual rate: $4,000,000 × 0.08 × (90/365) = approximately $78,900 in equalization interest.

Where Does the Interest Go?

Equalization interest flows directly to initial investors, not the fund itself. The calculation allocates the payment pro rata among original LPs based on their ownership percentages at the initial close. This distinguishes equalization interest from management fees or organizational expenses, it represents partner-to-partner compensation for capital that earlier investors effectively "lent" on behalf of those joining later.

What Makes This Complex in Practice?

Several factors compound the calculation challenge:

• Multiple capital calls between closes require separate interest calculations for each drawdown

• Different day count conventions (actual/365 vs. actual/360) affect results

• Some LPAs compound interest while others use simple interest

• Distributions occurring between closes may require additional adjustments

• Multiple subsequent closes mean tracking which investors owe interest to which predecessors

Finance teams typically net equalization amounts against the capital call due at the subsequent close. An early investor's capital call notice might show a credit from equalization proceeds offsetting part of their new funding requirement.

Fund administrators often configure systems to match specific LPA provisions, whether calculating based on interest day count or rate conventions that align with fund documentation. The calculations grow increasingly layered as funds move through third, fourth, and final closes with different investor cohorts at each stage.

Equalization interest represents a small but meaningful protection for early investors who committed capital before the investment thesis proved itself. Getting the math right preserves trust across the LP base and avoids awkward true-ups at audit time.