Investment Flow: How Capital Moves from LPs to Companies and Back

"Investment flow" describes how capital moves through a private-markets fund over its life: in from investors, out into companies, and eventually back to investors as returns. Understanding the full loop makes every other concept in venture and private equity easier to place.

The players

A private equity or venture fund is almost always structured as a limited partnership — a fixed-life vehicle of roughly 10 years (plus optional one-year extensions), with the management firm as the general partner and the investors as limited partners.

• Limited Partners (LPs). The investors in the fund — pensions, endowments, family offices, funds of funds, and wealthy individuals. They supply the capital. LPs enter by signing the fund's offering documents, and they generally must be accredited or qualified investors.
• General Partner (GP). The firm that raises and manages the fund, sources deals, makes investment decisions, and supports portfolio companies. The GP earns a management fee plus performance-based compensation, and the SEC notes that private-equity advisers "often have interests that are in conflict with the funds they manage" — conflicts they are required to disclose.
• Portfolio companies. The businesses the fund invests in.

The flow, step by step

1. Fundraising. The GP raises a fund. LPs sign subscription agreements committing capital — a promise to provide money when asked, not an upfront transfer.
2. Capital calls. As the GP finds deals, it "calls" capital from LPs in tranches — drawing against those commitments only as it needs to deploy. A capital call is the GP's legal right to demand a portion of the money each LP committed.
3. Investment. The fund deploys called capital into portfolio companies in exchange for equity (or other instruments). The mechanics of investing into a company are typically governed by the NVCA model legal documents — the Term Sheet, Stock Purchase Agreement, Investors' Rights Agreement, Voting Agreement, ROFR/Co-Sale Agreement, and Management Rights Letter that have become the industry-standard templates for venture financings.
4. Value creation. Over years, the GP supports the companies — governance, hiring, introductions, follow-on funding — to grow their value.
5. Exits. Investments are realized through an acquisition, a secondary sale, or an IPO. Cash (or liquid stock) comes back to the fund.
6. Distributions. Proceeds flow back to LPs and the GP according to the waterfall defined in the fund agreement.

Capital-call mechanics

Because LPs pledge rather than wire money upfront, the GP converts commitments into cash when it is ready to invest. In practice this means:

• Drawdown notices. The GP issues a written capital-call notice specifying the amount and a due date, typically giving LPs a short notice period (often around 10 business days) to fund.
• Default consequences. An LP that fails to fund a call can face steep penalties under the partnership agreement — interest, forced sale of its interest at a discount, or forfeiture of part of its commitment.
• Recycling. Many funds may "recycle" early proceeds — re-investing returned capital rather than distributing it — so cumulative investment can exceed committed capital over the fund's life.

Subscription credit lines (capital-call facilities) add a wrinkle: the GP can borrow against LP commitments to fund deals immediately, then call capital later to repay the line. This delays the actual timing of cash leaving LP accounts and, by shortening the period LP money is "at work," tends to flatter the fund's reported internal rate of return (IRR).

Fees: the "2 and 20"

The GP charges a management fee to fund operations and earns carried interest as its share of profits. The shorthand "2 and 20" refers to this fee-and-carry structure.

• Management fee. Typically 1–2% per year, charged regardless of performance and taxed as ordinary income (top federal marginal rate 37%). A common nuance: during the investment period the fee is usually charged on committed capital, then steps down to invested capital (or net asset value) afterward — which materially reduces fee drag in a fund's later years.
• Carried interest. The GP's share of profits — standardly ~20% for buyout and venture funds — paid only on gains above the preferred return.

How returns are split: the waterfall

When money comes back, the distribution waterfall allocates it between LPs and the GP in a defined sequence of tiers:

1. Return of capital. LPs first get back the capital they contributed.
2. Preferred return (hurdle). LPs then receive a minimum return — the customary hurdle is roughly 7–9%, commonly 8% — before the GP shares in profits.
3. GP catch-up. Once LPs have their preferred return, a catch-up tier directs distributions to the GP (often 100% of further profits) until the GP has earned its target share — e.g. 20% — of total profits above the return of capital.
4. Carried interest split. Remaining profits are then split, typically 80/20 between LPs and the GP.

European vs. American waterfalls

The order can be applied at the fund level or the deal level, and the difference matters:

• European (whole-of-fund). All LP capital and the fund-level preferred return must be returned before any carry flows to the GP. More LP-favorable.
• American (deal-by-deal). The GP can take carry on each realized deal once that deal clears its hurdle, without waiting for the whole fund. More GP-favorable, because the GP gets paid earlier.

A worked example

Take a $100M fund, fully called and invested, that returns $150M at the end of its life, with an 8% preferred return and 20% carry under a 100% GP catch-up:

• Return of capital: the first $100M goes to LPs. Remaining profit to split: $50M.
• Preferred return: LPs receive the 8% preferred return next (simplified here to an illustrative ~$8M), bringing them above their hurdle.
• GP catch-up: the GP then receives 100% of the next distributions until it holds 20% of the profit distributed so far.
• 80/20 split: all remaining profit is divided 80% to LPs and 20% to the GP as carried interest.

Reading the flow back: return metrics

LPs judge how well capital is flowing back using a handful of standard ratios:

• DPI (Distributions to Paid-In). Realized cash actually returned, divided by capital called. The clearest measure of money "and back."
• RVPI (Residual Value to Paid-In). The value of unrealized holdings still in the fund, relative to capital called.
• TVPI (Total Value to Paid-In). DPI + RVPI — total value (realized plus unrealized) per dollar paid in.
• Net IRR. The time-weighted annualized return to LPs after fees and carry.

The J-curve

Early in a fund's life, LPs typically see negative net returns: management fees are being charged while investments are still young and unrealized, and exits have not yet arrived. As portfolio companies mature and distributions begin — usually years into the ~10-year life — returns climb back up and ideally into positive territory. Plotted over time, this dip-then-rise traces the characteristic J-curve.

Tax and the "carried interest" debate

The tax treatment of carry is a long-running policy fight. Management fees are taxed as ordinary income (up to 37%), but carried interest held more than three years is taxed as long-term capital gains — a top rate of 20%, plus the 3.8% net investment income tax, for a maximum of 23.8%. That gap is the basis of the so-called "carried interest loophole" debate. The 2017 tax law raised the required holding period from one year to three years.

Regulatory context (2026)

LPs receive offering documents that disclose and govern fees, expenses, and conflicts of interest. The SEC adopted broader Private Fund Adviser Rules in 2023, but the Fifth Circuit vacated those rules in 2024 — so in 2026, disclosure obligations rest on existing investment-adviser rules and the negotiated terms of each fund's limited partnership agreement rather than on that vacated rule.

Why the loop matters

Every workflow a fund runs — sourcing, diligence, portfolio monitoring, LP reporting — exists to make some part of this flow faster, safer, or better-documented. Keep the loop in mind and the rest of private markets stops looking like jargon and starts looking like a process.

For the front-half of this loop in detail, see the deal-flow lifecycle.

Sources & further reading

• Private Equity Funds — SEC / Investor.gov.
• Private equity fund — Wikipedia.
• Capital call — Wikipedia.
• Distribution waterfall — Wikipedia.
• Distribution Waterfall — Corporate Finance Institute (CFI).
• Carried interest — Wikipedia.
• 2 and 20 — How the 2 and 20 Hedge Fund Fee Structure Works — Corporate Finance Institute (CFI).
• Model Legal Documents — National Venture Capital Association (NVCA).