casemark/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