drafting-limited-partnership-agreements

# Drafting Limited Partnership Agreements

Structures LPA terms covering fund economics, governance, investment period mechanics, harvesting period provisions, key person clauses, and LP protective rights for private investment funds.

## When To Use

- Preparing a new LPA for a private equity, venture capital, real estate, or credit fund
- Negotiating or redlining LP-requested modifications to GP-proposed terms
- Summarizing material LPA provisions for investor side letters or fund-of-funds diligence
- Amending existing LPA terms (e.g., extending investment period, modifying key person triggers)

## Inputs To Gather

- **Fund strategy and structure**: asset class, target fund size, GP entity name, jurisdiction of formation [VERIFY]
- **Economic terms**: management fee rate and basis (committed vs. invested capital), carried interest percentage and hurdle rate, GP commitment amount or percentage
- **Investment period**: duration (typically 3–6 years), conditions for early termination or extension, reinvestment rights scope
- **Harvesting/wind-down period**: duration after investment period end, permitted follow-on investment limits, extension mechanics
- **Key person provisions**: named key persons, trigger events (death, disability, departure, cause), suspension vs. automatic termination of investment period, cure/replacement mechanics
- **Distribution waterfall**: European vs. American waterfall, preferred return calculation (compounded or simple), catch-up allocation, clawback obligations and escrow/guarantee mechanics
- **LP governance rights**: LPAC composition and authority, no-fault removal/termination thresholds (typically 66⅔%–75%), cause removal thresholds, consent rights for fund term extension or strategy deviation
- **Transfer and withdrawal**: LP transfer restrictions, GP consent requirements, ERISA / tax-exempt investor transfer limitations
- **Reporting and audit**: quarterly/annual reporting obligations, audit standards, capital account statement requirements
- **Side letter expectations**: MFN provisions, excuse/exclusion rights, co-investment allocation framework

## Workflow

1. **Confirm fund parameters** — Verify fund strategy, jurisdiction of formation, target size, and GP/LP entity structures. Determine whether the fund follows a blind-pool or deal-by-deal model, as this affects commitment and drawdown mechanics.

2. **Set economic terms** — Draft management fee provisions specifying rate, calculation basis, offset mechanics (for portfolio company fees), and step-down schedule post-investment period. Define carried interest allocation, including hurdle rate, catch-up percentage, and whether carry is calculated on a deal-by-deal or whole-fund basis.

3. **Draft investment period mechanics** — Specify start date, duration, early termination triggers (key person event, LP vote, cause), and any GP right to extend (typically 1 year with LPAC consent). Define reinvestment rights: distinguish between recycling of invested capital returned within the investment period vs. reinvestment of follow-on amounts post-period.

4. **Draft harvesting period provisions** — Set duration (typically 2–3 years post-investment period), permitted activities (follow-on investments, defensive actions), and extension rights. Specify limits on new platform investments.

5. **Structure key person provisions** — Name key persons and define trigger events. Specify whether a key person event suspends the investment period automatically or requires LP vote. Draft cure mechanics: replacement timeline (typically 90–180 days), LPAC or LP approval for replacement, and consequences of failure to cure.

6. **Build distribution waterfall** — Draft the multi-tier waterfall: (a) return of contributed capital, (b) preferred return, (c) GP catch-up, (d) carried interest split. Include clawback obligations with escrow percentage (typically 20–30% of carry distributions) and GP guarantee language. Specify tax distribution mechanics. [VERIFY — state law governs clawback enforceability and escrow requirements]

7. **Draft LP governance and protective rights** — Define LPAC role (conflicts review, valuation oversight, fee offset approval). Set voting thresholds for no-fault termination, cause removal, fund term extension, and amendments. Specify information rights and reporting cadence.

8. **Address regulatory and tax provisions** — Include ERISA plan asset regulation compliance (25% blocker or operating company exemption), UBTI mitigation structures, FATCA/CRS reporting obligations, and anti-money laundering representations. [VERIFY — ERISA thresholds and tax structuring depend on fund-specific facts]

9. **Draft transfer, withdrawal, and default provisions** — Specify LP transfer restrictions (GP consent, minimum transfer size, ERISA/tax-exempt assignee limitations). Define LP default consequences: forfeiture percentage (typically 25–50% of capital account), loss of voting rights, forced sale at discount.

10. **Compile and cross-reference** — Assemble all articles, ensure defined terms are consistent, verify cross-references between waterfall, clawback, and default provisions. Attach schedules (capital commitment schedule, key person list, investment restrictions).

## Output

A complete draft LPA (or specified sections) containing:

- Defined terms and interpretation provisions
- Capital commitment, drawdown, and default mechanics
- Investment period and harvesting period articles
- Management fee and fund expense provisions
- Distribution waterfall with carried interest, clawback, and escrow terms
- Key person clause with trigger, suspension, cure, and termination mechanics
- GP removal provisions (for cause and no-fault)
- LPAC charter and LP consent rights
- Transfer restrictions and reporting obligations
- Representations, warranties, and regulatory compliance provisions
- Signature blocks and schedules

## Quality Checks

- Distribution waterfall tiers are internally consistent — preferred return, catch-up, and carry split sum correctly and match the economic deal
- Key person trigger events align with the named individuals and their roles; cure period and replacement mechanics are clearly sequenced
- No-fault termination and cause removal thresholds are specified with exact percentage requirements and counting mechanics (by interest, by number, or both)
- Clawback obligations match the waterfall — escrow amount, guarantee scope, and survival period are defined
- Investment period reinvestment rights do not conflict with harvesting period activity restrictions
- ERISA benefit plan investor percentage and UBTI blocking structures are addressed [VERIFY]
- All defined terms are used consistently; no orphan definitions or circular cross-references
- Management fee step-down timing aligns with investment period termination provisions
- Side letter MFN scope and excuse/exclusion triggers are compatible with the base LPA terms