Why is there no recycling? It seems like a no-brainer to for the LP to allow recycling, so maybe I'm failing to see some perverse incentive that would exist if recycling were allowed?
There is actually some recycling allowed, as described in the "disclaimer" section. But the reason is interesting:
Many organizations that invest in VCs are extremely efficient, analytical operations. They model each investment in their portfolio carefully.
Imagine you are considering playing blackjack at a $1-per-bet table. You start with $100. You play well, so you expect to end up with about $97, since with good play, the house edge is about 3%. Two hours later, all your money is gone!
Did you lose every time? No. But you re-invested the proceeds of each game, and that modified your return expectations.
Similarly, when VCs have unlimited re-investment, it plays havoc with their investors' return calculations. Also - separate issue - if you re-invest late in a fund's life, you increase the odds that the fund closes up shop while it still has a bunch of active companies in its portfolio.
So while it's not prohibited outright, it's often restricted, and knowing that can help you understand certain behaviors.
Most funds allow for recycling within defined parameters of total dollars or time frame. VCs and LPs are not ignorant, and the issues raised in the article are not new. In most of the funds whose legal structure I am familiar with, a 2x return in a year would be welcome, and the original invested capital would be recyclable into new investments to create further return.
