True Up

What is a true up?

A true-up is a catch-up payment that puts a party where it would have been if it had been in from the start. In private funds it is the payment a late-closing investor makes at a subsequent closing, equal to its share of capital already drawn from the investors who closed earlier, so every investor ends up proportionally funded.

Which true-up do you mean?

The word travels across three settings, and mixing them up is the most common error.

• Fund admission. An investor admitted at a subsequent closing pays in its share of everything already called, plus a balancing amount reflecting value created since the first closing. This is the meaning a limited partner uses without qualification.
• Fee and carry reconciliation. Amounts calculated on estimates during a period are recomputed against final figures, and the difference is settled. Management fees on a growing commitment base and incentive allocations both work this way.
• Cap table and purchase-price adjustment. A post-closing recomputation of share counts or consideration once final numbers are known, common in acquisitions and in option pool sizing.

All three share one shape: an estimate or a timing gap, then a corrective payment. The fund-admission version is the one with real machinery behind it, so it is worth reading in a filed document.

The mechanics of a subsequent-closing true-up

TCW Spirit Direct Lending's limited liability company agreement spells the structure out with unusual clarity, and its vocabulary is close to market standard.

The agreement offers common units each representing a commitment of $100. Each unit is issued for $0.01 and obligates the holder to make additional future capital contributions of $99.99. A unit's undrawn commitment equals $100 less the aggregate contributions made or deemed made on it.

When the fund holds a closing after the initial closing, an investor admitted at that closing is a later-closing investor, and it must contribute two separate amounts for each newly issued unit.

• A true-up contribution, equal to the aggregate contributions drawn down on a unit issued at the initial closing through the new unit's closing date.
• A NAV balancing contribution, equal to any increase in the net asset value of a unit issued at the initial closing through that closing date, after giving effect to a pre-closing distribution, excluding increases attributable to additional capital contributions.

The two amounts are treated very differently, and that asymmetry is the substance of the clause.

• True-up contributions may be retained by the fund for any purpose, or distributed as excess cash to all unitholders. Any distribution of true-up contributions is treated as a return of previously made capital contributions and therefore increases the recipients' undrawn commitment, making the money recallable.
• NAV balancing contributions do not reduce the paying investor's undrawn commitment, are not treated as capital contributions for purposes of calculating the incentive fee, and are not treated as amounts distributed to unitholders for that calculation either.

In plain terms: the true-up restores the capital account, and the balancing contribution pays for the value the earlier investors created while the latecomer was not exposed.

Ahead of each subsequent closing the fund estimates profits and losses through that date and distributes any undistributed estimated profits, in cash where available and otherwise through a deemed capital call and matching deemed distribution. That pre-closing distribution is what makes the NAV comparison clean.

A worked example with the arithmetic shown

Use the $100 unit convention above. Assume a fund that has drawn $40 per unit since its initial closing, and that net asset value per unit stands at $42 immediately after the pre-closing distribution. A new investor commits $10,000,000 at the subsequent closing. All figures here are hypothetical.

• Units issued. $10,000,000 divided by $100 per unit equals 100,000 units.
• True-up contribution. 100,000 units times $40 drawn per unit equals $4,000,000.
• NAV balancing contribution. NAV of $42 less $40 of contributions equals $2 per unit of appreciation; 100,000 units times $2 equals $200,000.
• Total payable at the subsequent closing. $4,000,000 plus $200,000 equals $4,200,000.
• Remaining undrawn commitment. $10,000,000 less the $4,000,000 true-up equals $6,000,000. The $200,000 does not reduce it.

Re-check each line. 10,000,000 / 100 = 100,000. 100,000 x 40 = 4,000,000. 42 - 40 = 2, and 100,000 x 2 = 200,000. 4,000,000 + 200,000 = 4,200,000. 10,000,000 - 4,000,000 = 6,000,000.

Now the other side. If the fund distributes the $4,000,000 of true-up contributions to the initial-closing holders, that distribution is a return of capital, so their aggregate undrawn commitment rises by $4,000,000 and the fund can call it again later. The early investors get cash back today and keep the same total obligation, which is why a true-up is not a windfall to them.

Where it shows up in documents

In a limited partnership or limited liability company agreement, look in the article on organization and admission of investors rather than the capital article. In the TCW agreement the relevant provisions are Section 3.3.1 on subsequent closings and the contributions required, Section 3.3.2 on the special treatment of those contributions, and Section 6.1.1 on the commitment and undrawn commitment mechanics, with the defined terms collected in an appendix.

The related documents to pull at the same time:

• The subscription agreement, which is how a later-closing investor accedes to the agreement. TCW's provision admits a later-closing investor on execution of a subscription agreement and a counterpart signature page, without requiring any other member's consent.
• The capital call notice provisions, because the true-up arrives as a drawdown. TCW's agreement requires at least ten business days between dispatch of a call notice and the due date, reduced to five business days for the initial drawdown on newly issued units.
• The fee schedule, since whether the true-up and balancing amounts count toward fee and carry calculations is decided there, not in the waterfall.

Common mistakes

Charging interest and calling it a true-up. Many agreements add an interest or equalization charge on top of the true-up, compensating earlier investors for the time their money was outstanding. The cited agreement does not use interest; it uses a NAV balancing contribution instead. These are different mechanisms with different tax and fee consequences, and you cannot assume which one a given fund uses.

Netting the two payments. A true-up contribution and a balancing contribution behave differently: one reduces undrawn commitment and one does not. A model that lumps them together will misstate both remaining commitment and fee base.

Assuming the true-up is permanent capital for the fund. Where the fund passes true-up contributions back out, the amount becomes recallable rather than gone, which changes the investor's liquidity planning more than its return.

Forgetting the fee consequence. If balancing contributions are excluded from the incentive fee calculation on both the contribution and distribution sides, as they are in the cited agreement, then a naive fee model built from cash flows alone will overstate the manager's economics.

How it relates to adjacent terms

A first close is what creates the need for a true-up at all. A fund that closes once and never again has no subsequent-closing mechanics, which is why single-close vehicles and special purpose vehicles rarely carry the language.

A capital call is the delivery mechanism. The true-up is not a separate payment channel; it arrives as a drawdown notice under the same article that governs every other call.

Committed capital is the figure the true-up protects. The entire point of the tier is that after the subsequent closing, each investor's contributed capital stands in the same proportion to its commitment as everyone else's.