Equalization Interest
Private Equity glossary · PEF
Definition
Interest paid by LPs admitted at subsequent closes to LPs admitted at first close, compensating early-closing LPs for the time their capital has been at work in the fund and bringing all LPs to the same economic starting point as of first close. Mechanics: subsequent-close LPs pay (a) their share of capital previously called, plus (b) interest on those amounts at an agreed rate (typically prime + 200 bps or fund's preferred return rate) from the date of original calls. A typical buyout fund's fundraising window (first close to final close) is 6-18 months, during which equalization interest can be material. Equalization is automatic in the LPA; without it, late-closing LPs would free-ride on early-closing LPs' capital.
Equalization Interest in plain English
A private equity fund doesn't collect all its investors on day one — fundraising can stretch 6-18 months, so some investors join at the "first close" and others months later at a "final close." That's unfair to the early ones, whose money was already invested and working while the latecomers sat on the sidelines. "Equalization interest" is the fix: when latecomers join, they pay their share of everything already invested PLUS interest on it (often the fund's preferred rate, or prime plus about 2 percentage points) as a catch-up payment that goes to the early investors. It's like joining a group vacation fund late — you chip in your share of costs already spent, plus a little extra for the head start everyone else gave you. This happens automatically under the fund's contract; without it, latecomers would be free-riding on the early investors' money.
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