In-Kind Distributions
Definition
An in-kind distribution, or distribution in specie, is a private fund's transfer of securities or other assets directly to its investors in place of the cash it would have received by selling them. It is most common in venture and growth funds after a portfolio company lists: rather than sell a large block into a thin market, the fund distributes the shares pro rata and lets each investor decide when to sell. The limited partnership agreement sets the rules: usually only marketable securities may be distributed in kind before the fund's final liquidation, the shares are valued at a trailing average of market prices (often 10 to 30 trading days) for the purpose of calculating carried interest and the fund's returns, and investors who cannot hold securities may elect to have the fund sell on their behalf. The distribution counts as a realization at the valuation price in the fund's DPI, whatever the investor later sells for, and it is generally not a taxable event until the investor sells.
Why it matters
In-kind distributions are where a fund's reported return and an investor's actual return part company. The fund books the exit at a trailing average price, pays itself carry on it, and moves on; the investor holds a block of stock that may be locked up, thinly traded and falling. Venture returns in particular are often quoted on distribution values that no investor realized. The clause also decides who bears the cost of turning shares into cash: the direct institutional investor with a trading desk, or the feeder-fund investor whose platform sells whenever it gets around to it. An investor evaluating a manager's track record should ask how much of its DPI was distributed in kind, at what values, and what those shares were worth a quarter later.
Common misconceptions
- •An in-kind distribution is not cash. It is a realization for the fund's accounting and a holding for the investor; the value on the statement is the average price over a window that has already passed.
- •The valuation is not the investor's proceeds. Blocks distributed to many investors are often sold by many of them at once, which is the selling pressure the fund avoided by distributing.
- •Carry on an in-kind distribution is real money. The manager receives its share of the distribution in shares too, but it may sell them, and the clawback covers only later fund losses, not the shares' decline after distribution.
- •Not everything can be distributed in kind. Most LPAs restrict pre-liquidation in-kind distributions to marketable securities; private stock, LP interests and real assets can usually be distributed only at final wind-up or with advisory committee consent.
Technical details
Worked example: a venture exit distributed in shares
The $100 million fund used across this cluster holds 8 million shares of a company that lists at $20. After the 180-day lock-up, the fund distributes the shares. The LPA values them at the 20-day average closing price before distribution, $18.50: $148 million on a $12 million cost.
Carried interest: with the fund past its hurdle, the manager receives 20 percent of the gain in shares, about 1.47 million shares, and the investors 6.53 million. The fund books a $148 million distribution; DPI rises by 1.48x.
The stock trades down to $13 over the following six weeks as distributed shares are sold. An investor who sold in the first week received about $17; one who held received $13. Neither number appears in the fund's reports.
A feeder holding 5 percent of the fund receives 326,500 shares, sells them over three weeks at an average of $15, and distributes $4.9 million of cash to its investors against the $6.0 million the master fund recorded for that share.
What the LPA specifies
Eligible assets: marketable securities only before liquidation; anything at liquidation; other assets with advisory committee consent.
Valuation: trailing average (10, 20 or 30 days) of closing or VWAP prices, with discounts for restricted stock, thin trading or large blocks relative to volume.
Timing: often after lock-up expiry; some documents let the manager distribute during a lock-up with the restrictions attached.
Election: an investor may elect cash, in which case the fund or a liquidating trust sells on its behalf and distributes net proceeds.
Carry settlement: whether the manager takes its carry in the distributed shares or in cash from other fund assets.
Notice: advance notice of the distribution date and mechanics, brokerage instructions, basis and holding-period information.
Tax mechanics for US investors
General rule: a partnership's distribution of property is not taxable to the partner; the partner's basis in the shares equals the partnership's basis, limited to the partner's basis in its interest.
Section 731(c): distributions of marketable securities are treated as cash to the extent they exceed the partner's basis, unless an exception applies (the investment partnership exception usually does for a fund that has never held non-investment assets).
Holding period: tacks to the partnership's, so a sale soon after distribution can still be long-term.
Tax-exempt and foreign investors: usually elect cash to avoid holding securities; UBTI and withholding considerations apply to the sale.
Investors should obtain the basis and acquisition date per lot with each distribution; the fund's K-1 and distribution notice carry them.
Where in-kind distributions appear
Venture and growth equity: the norm after IPOs and direct listings; a large share of venture DPI in strong IPO years is in kind.
Buyout: less common; sponsors usually sell down over time after an IPO and distribute cash, but partial in-kind distributions of listed stock occur.
Crypto and token funds: distributions of tokens, with valuation and custody questions that make the mechanics harder.
Real assets and credit: rare before liquidation; at wind-up, remaining assets may go to a liquidating trust rather than to investors directly.
Interval funds and BDCs: not applicable; registered funds pay cash, though some interval funds reserve the right to redeem in kind under stress.
Reading a track record with in-kind distributions
Ask what share of DPI was distributed in kind and at what valuations; ask for the price 30 and 90 days after each distribution.
Check whether the manager's carry on in-kind exits was taken in shares or cash and whether the manager sold immediately.
For a feeder, check its realized cash against the master fund's recorded distribution; the gap is the feeder's execution.
Prefer valuation windows that end at the distribution date over ones that start earlier; and prefer discounts for blocks large relative to volume.
Frequently asked questions
- What is an in-kind distribution?
- Getting shares instead of money. When a private fund exits an investment that has become publicly traded, it can either sell the shares and send investors cash, or send investors the shares themselves. The second is an in-kind distribution. Each investor then holds the stock in a brokerage account and sells it, or keeps it, on its own schedule.
- Why do funds distribute stock instead of selling it?
- Because selling a large block quickly moves the price against the seller, because investors have different tax positions and time horizons, because a distribution avoids the fund being seen as timing the market, and because the valuation used for the distribution locks in the fund's reported return and carry at that date. Venture funds holding 10 to 20 percent of a newly public company have little choice; a sale would take months and depress the price.
- How are in-kind distributions valued?
- At a market-based price defined in the LPA, typically the average closing price over the 10, 20 or 30 trading days before the distribution date, sometimes with a discount for restricted or thinly traded stock. That value is what the fund records as distributed, what the manager's carried interest is calculated on, and what appears in DPI. If the stock falls 30 percent in the weeks after distribution, the fund's reported return does not change; the investor's does.
- Are in-kind distributions taxable?
- For a US taxable investor, usually not at the time of distribution. A distribution of appreciated securities by a partnership is generally not a taxable event to the partner; the partner takes the fund's basis in the shares and recognizes gain when it sells. That deferral is one of the attractions. The exceptions are complicated (marketable securities can be treated as cash under Section 731(c) in some cases, and the fund's basis allocation matters), so investors ask the fund for the basis and holding period with every distribution.
- Can an investor refuse shares and take cash?
- Often. Many LPAs let an investor that cannot hold securities (some pension plans, foreign investors, feeders) elect to have the fund or a liquidating agent sell its share and distribute cash, net of costs. The sale price is whatever the agent achieves, which may be lower than the distribution valuation. Investors that hold the shares receive them into a brokerage account, subject to any lock-up or volume limits that still apply.
- What happens to in-kind distributions in an access fund?
- The feeder receives the shares as the master fund's limited partner, and its documents almost always direct the platform to sell them and distribute cash, since individual investors are not set up to receive stock. The sale may take days or weeks and may realize less than the valuation the master fund recorded, so the feeder's DPI can fall below the master's, and the tax deferral available to a direct holder is lost.