Fund structure and terms

Commitment period

The window during which the GP may call capital for new investments. It sets the fee base, the recycling window, and the point at which the step-down bites. It normally ends early on a key-person event or on the first closing of a successor fund.

Field	Value
Formula	Fee during the commitment period = rate * C per year. Cost of one extra year = rate * C - rate_2 * base_2
Worked	Reference fund: five years at 2.00 percent of 500.0 = 50.00. A sixth year on commitments would cost 10.00 against the 5.70 actually charged on the invested-capital base, so 4.30
Deployment against fee	Only 105.0 of 425.0 is deployed in year 1, so the year-1 fee of 10.00 is 9.52 percent of the capital actually working
Over the full period	50.00 of fee against an average deployed balance over the five years of 285.0 - an effective 3.51 percent per year on capital at work

• The gap between the fee on commitments and the fee on capital at work is at its widest in year 1 and closes as the fund deploys. That is the defensible case for the commitments base: the manager is paid for readiness. It stops being defensible when deployment is slow for reasons inside the manager's control.
• An early end to the commitment period is worth more than a reduction in the rate, because it moves the base rather than the rate. Any LP negotiating fees should price the successor-fund trigger first.
• Capital may usually still be called after the commitment period for follow-on investments, fees, expenses and to satisfy indemnity obligations. The reference fund calls 18.70 after year 5 for exactly those reasons - a small number that surprises LPs who believed the calls had stopped.

Term and extensions

The fund's stated life, after which it must wind down, together with the GP's right to extend. The two questions are how many extensions are available on whose consent, and what fee is charged during them.

Field	Value
Formula	Cost of an extension = fee during the extension + the option value the GP retains on the unsold assets, against the discount a forced sale would have suffered
Worked	Reference fund: 10-year term, fully realised inside it. A one-year extension charged at 1.50 percent of the remaining 40.0 of cost basis would cost 0.60
Against the alternative	Investment F realises 80.0 in year 10 against a year-9 mark of 72.0. Forcing that sale a year early at a 15 percent discount to the mark would have cost 80.0 - 61.2 = 18.8, thirty times the extension fee
The other direction	Investment B was marked at 45.0 in year 4 and realised 30.0 in year 6. Two more years of holding cost 15.0 of value plus the fee charged on it

• An extension is an option and the LP is writing it. The right price is a fee holiday during the extension, which aligns the GP's incentive with actually selling rather than with continuing to be paid for holding.
• Extensions in the LPA and continuation vehicles are competing answers to the same problem, and the second is far more expensive to the LP. A fund with generous extension rights has less need to run a GP-led secondary, which is an argument for granting them.
• Ask what happens on the day after the final extension expires. An LPA whose only remedy is a mandatory liquidation gives the GP a strong hand in negotiating a further extension, because the alternative is a fire sale that the LPs also do not want.

Recycling and reinvestment provisions

The right to reinvest capital returned from realisations, or to call again capital previously distributed, so that total deployment exceeds total capital called. It is a return term expressed in legal language and located in the legal section of the document.

Field	Value
Formula	Total deployment = I + recycled amount, capped at a stated percentage of commitments or at a stated period. TVPI rises on an unchanged paid-in base
Worked	A 20 percent recycling right on 500.0 of commitments permits 100.0 of redeployment, raising total cost deployed from 425.0 to 525.0 - 105.0 percent of commitments
Effect on the reference fund	Recalling 100.0 in year 7 and exiting the redeployment at 2.00x in year 10 raises LP distributions from 848.0000 to 928.0000 and net IRR from 11.9825 percent to 12.8497 percent
Effect on carry	GP carry rises from 87.0000 to 107.0000, because fund profit rises from 435.0 to 535.0
The reporting problem	The same fund reports a DPI of 1.8560x or 1.7133x depending on whether the recall is netted against distributions or added to paid-in

• Recycling is the most underweighted return term in a private equity LPA. Two funds with identical investment performance and different recycling rights report materially different multiples, and the difference is documentary rather than investment skill.
• The three limits that matter are the percentage cap, whether the right expires with the commitment period, and whether recycled capital is limited to returned cost or extends to profit. A right to recycle profit is a much larger permission than a right to recycle cost.
• Recycling also extends the LP's exposure. Capital the LP thought it had back is called again, so the true duration of the commitment is longer than the distribution schedule suggests. Model the unfunded commitment as including the recycling capacity.

Key-person provisions

A clause suspending the investment period, and sometimes triggering further consequences, if named individuals cease to devote substantially all of their time to the fund. It exists because the LP underwrote people, not an institution.

Field	Value
Formula	On trigger, further calls for new investments cease. The fee base freezes at its then level unless the LPA steps it down on the same event
Worked, timing matters	A trigger at the end of year 2 on the reference fund would stop 220.0 of further deployment - investments D, E and F, which produced 485.0 of the 935.0 of proceeds
Fee consequence	If the fee stays on commitments during a suspension, the LP pays 10.00 per year on a fund forbidden from investing
What survives	Existing investments continue to be managed, follow-on capital is normally still callable, and carry on those investments is unaffected

• A suspension that requires an affirmative LP vote to lift is a very different term from one that lifts automatically on the appointment of an acceptable replacement. The first gives the LPs control; the second gives it to the GP.
• The list of named individuals is the negotiation. A key-person clause naming the whole investment committee is close to unfalsifiable; one naming two founders is real. Ask which individuals actually sourced and led the investments in the prior fund.
• The fee treatment during a suspension is the term most often left out. A suspension with no fee step-down converts a governance protection into a period of paying full price for nothing.

For-cause and no-fault removal

Two distinct rights to replace the GP. For-cause removal requires a defined bad act, usually established by a final judgment or award. No-fault removal requires only a high supermajority of LP commitments and no reason at all.

Field	Value
Formula	Consent needed = threshold * LP commitments. On a 500.0 fund, two thirds is 333.3 and three quarters is 375.0
For cause	Commonly a simple to bare majority once cause is established, but conditioned on a final non-appealable judgment - a condition that can take years to satisfy
No fault	Commonly three quarters or more of LP commitments, and usually leaves the GP with carry accrued to the removal date or a stated fraction of it
Worked, the economics of removal	Removing the GP at the end of year 7 on the reference fund, with carry accrued on the year-7 position, leaves 395.0 of NAV to be managed by a replacement and the accrued carry to be settled

• The practical obstacle to any removal is coordination, not the threshold. Assembling three quarters of LP commitments among LPs who do not know each other's positions, inside a confidentiality regime that discourages them from comparing notes, is the real barrier. An LPA that permits LPs to communicate with each other lowers that barrier more than a lower threshold would.
• For-cause removal conditioned on a final judgment is close to unusable, because the fund's remaining life is often shorter than the litigation. The negotiable improvements are a lower evidentiary standard and an interim suspension right pending resolution.
• What happens to the carry on removal is the whole economic question and it is often buried. A GP removed for cause that keeps its full accrued carry has lost the fee and kept the upside.

Limited partner advisory committee

A committee of selected LPs that reviews conflicts, approves valuations in some agreements, and consents to specified actions. Its powers are consultative except where the LPA gives it a consent right, most commonly over conflicted transactions.

Field	Value
Typical consent items	Related-party transactions, cross-fund investments, transfers of assets to a continuation vehicle, extensions of the term, and changes to the valuation policy
Composition	Appointed by the GP in most agreements, from among the larger LPs, and not elected by commitment size
What it is not	Not a fiduciary of the LPs who are not on it, and not a substitute for an LP vote

• LPAC approval of a conflicted transaction is the mechanism by which a GP-led secondary is cleared, and it is the single most consequential thing an LPAC does. An LPAC whose members are also being offered continuation-vehicle terms is approving a transaction it has an interest in.
• The valuable procedural terms are the right to retain independent advisers at fund expense, a requirement that the GP present a written conflicts memorandum, and minutes that are made available to all LPs. None of them change the LPAC's power; all of them change what the other LPs can see.
• An LP not on the LPAC should read the LPAC consent items as a list of things that will happen without its involvement, and price the terms accordingly.

Source: ILPA Private Equity Principles address LPAC composition, independence and conflict review.

Most-favoured-nation elections

A right for an LP to elect into terms granted to another LP in a side letter. It is almost always subject to a commitment-size threshold, and to carve-outs for terms the electing LP is not eligible for.

Field	Value
Formula	An LP may elect into a side letter granted to an LP whose commitment is no larger than its own, or above a stated absolute threshold, whichever the LPA specifies
Worked, threshold effect	On a 500.0 fund, an MFN threshold of 50.0 excludes an LP committing 25.0 from every election. An LP at 100.0 can elect into side letters granted to LPs at or below 100.0
Standard carve-outs	Regulatory and statutory terms, terms specific to a sovereign or governmental investor, and co-investment or capacity rights, which are the ones with economic value
Process	The GP delivers a schedule of side letter terms after final close and the LP elects within a stated period, often 30 days

• The MFN is worth what the carve-outs leave behind. If co-investment rights, fee discounts and reporting enhancements are all carved out, the election covers only the terms nobody wanted. Read the carve-out list before the threshold.
• A tiered MFN, where a larger commitment unlocks a wider set of side letters, converts the MFN into a pricing mechanism for commitment size. That is a legitimate design and it should be priced as a volume discount rather than treated as a protection.
• The disclosure schedule is more useful than the election right. An LP that sees the full set of side letters learns the actual price of access to the fund, whether or not it can elect into anything.

Transfer restrictions and the secondary discount

A prohibition on transferring an LP interest without GP consent, together with conditions on any permitted transfer. It is the reason an LP interest is illiquid as a matter of contract rather than only as a matter of market.

Field	Value
Formula	What a buyer acquires = (LP commitment / C) * NAV, and assumes (LP commitment / C) * (C - cumulative calls) of unfunded commitment. The price is that NAV share less a discount for the marks, the unfunded, and the consent risk
Common conditions	GP consent in its discretion, no adverse tax or regulatory effect on the fund, transferee eligibility representations, minimum transfer size, and payment of the fund's costs
Why the discount exists	A buyer must underwrite the marks, take the unfunded commitment, and obtain consent. Each of the three is priced
Worked, what a buyer takes on	Buying a 25.0 commitment at the end of year 3 means acquiring a 17.7500 share of a 355.0 NAV and assuming 7.9850 of remaining unfunded commitment

• The unfunded commitment is the part of a secondary purchase most often mispriced. A buyer at the end of year 3 of the reference fund takes on 31.94 percent of the original commitment still to be called, and on this fund most of that funds fees and expenses rather than new investments.
• GP consent in its discretion is what makes a stapled secondary possible: the GP can condition consent on the buyer committing to the successor fund. That is not improper and it is a real cost to the seller, who is paying for the GP's fundraising.
• Transfer restrictions and the secondary market together mean an LP's true liquidity is a price, not a right. An LP with any prospect of needing to exit should model the discount at which it could sell in a bad market rather than assume the marks.

Defaulting LP remedies

The consequences of failing to fund a capital call. The remedies are cumulative and escalate: interest on the unpaid amount, suspension of distributions and voting rights, forced sale of the interest, and forfeiture of a stated share of the capital account.

Field	Value
Formula	Forfeited amount = f * capital account. Reallocated over the non-defaulting commitments, it is worth f * capital account / (C - defaulting commitment) per unit of their commitments
Setup	An LP committing 25.0 defaults at the end of year 3, having funded 68.06 percent of its commitment, or 17.0150. Its share of the 355.0 NAV is 17.7500
Worked, 50 percent forfeiture	8.8750 forfeited and reallocated over the remaining 475.0 of commitments = 1.8684 percent of their commitments
Worked, full forfeiture	17.7500 reallocated = 3.7368 percent of the other LPs' commitments
The larger loss	The defaulting LP also gives up the 31.94 percent of its commitment it never funded, and with it any participation in a portfolio that went on to return 2.2000x gross

• A default is almost never a decision; it is a liquidity failure. The remedy schedule exists to make the failure expensive enough that an LP sells its interest at a discount instead, which is the outcome everyone including the defaulting LP prefers.
• The remedy that actually bites is suspension of distributions, because it applies immediately and requires no vote. Forfeiture requires the GP to act and creates a windfall for the other LPs that a court may look at, so it is used less often than it appears in the documents.
• For an LP, the number to monitor is not the default remedy but its own unfunded commitment against its liquid resources. The pacing arithmetic on the cash-flow page is the tool for that, and it is a better protection than any provision in the LPA.

Side letters

Bilateral agreements between the GP and an individual LP varying the LPA for that LP alone. They are the mechanism by which large investors obtain fee discounts, co-investment rights, enhanced reporting, excuse rights and regulatory accommodations.

Field	Value
Formula	Value of a fee discount of delta over an investment period of y years = delta * commitment * y. Value of a fee-free, carry-free co-investment right of amount Q = Q * (gross MOIC - net TVPI)
Economic terms	Fee discounts, carry reductions, and co-investment rights - the last of which is often worth more than either of the first two
Non-economic terms	Excuse rights from specified investments, enhanced or accelerated reporting, transfer consent pre-approvals, and confidentiality accommodations for public investors
Worked, a fee discount	A 25 basis point discount on a 50.0 commitment is 0.125 per year during the investment period, or 0.625 over five years - 1.25 percent of the commitment
Worked, co-investment	Co-investment at no fee and no carry on an amount equal to a 50.0 commitment, deployed at the fund's 2.2000x gross MOIC, is worth 60.0 of profit against the 34.8 the same 50.0 earns net inside the fund

• Co-investment rights are the most valuable side letter term and the least visible in a fee comparison, because they change the blended cost of the whole relationship rather than the stated fee. An LP that deploys as much again in fee-free co-investment has roughly halved its effective fee load on the strategy.
• Excuse rights are the term most likely to affect other LPs, because an excused LP's share of an investment is reallocated to those who are not excused. An LP without excuse rights should know how much of the fund's commitments hold them.
• The side letter schedule delivered at final close is the most informative document an LP receives during a fundraise, and it arrives after the commitment is signed. Asking for it before signing is the only way to price the terms.

Fund-of-one and separately managed accounts

Single-investor vehicles. A fund-of-one is a partnership with one LP, run on a negotiated version of the flagship terms. A separately managed account is a mandate under which the investor owns the assets directly. Both trade diversification for control and fee leverage.

Field	Value
Formula	Value of the negotiated terms = the difference in LP distributions between the flagship terms and the negotiated terms, run on the same cash flows. It is computable exactly, because the cash flows are the same
What is negotiable	Fee level and base, carry rate and waterfall type, hurdle, concentration limits, exclusions, reporting, valuation policy and termination rights
Worked, the fee effect	A whole-fund waterfall rather than deal-by-deal on the reference fund's cash flows is worth 8.1176 of carry and 56.8 basis points; a step-down to 1.50 percent of unrealised cost rather than 2.00 percent of commitments throughout is worth 33.80 of fee
What is given up	Diversification per dollar, access to the flagship's full deal flow, and the negotiating leverage of a large LP group on any mid-life amendment

• Allocation, not fees, is the risk in a single-investor mandate. The vehicle performs like the flagship only if comparable assets are allocated to it, and the written allocation policy is therefore a more important term than the fee schedule.
• The single largest structural gain available in a fund-of-one is the waterfall type, because it is a binary term the GP will trade for size when it will not trade the carry rate. Ask for whole-fund with a full clawback and an escrow before asking for a rate reduction.
• A fund-of-one does not remove the fee-on-commitments problem; it moves it into a document with one reader. Pacing and deployment discipline matter more, not less, because there is no other LP watching the deployment rate.

Continuation vehicles and GP-led secondaries

A transaction in which a fund sells one or more assets to a new vehicle managed by the same GP and funded by new investors, with existing LPs offered the choice of taking cash or rolling into the new vehicle. It is a conflicted transaction cleared through the LPAC.

Field	Value
Formula	The selling fund's proceeds equal the price paid by the continuation vehicle. Existing LPs elect cash or a rolled interest; the GP crystallises carry on the cash election
Worked, the reference fund	Selling investment D to a continuation vehicle at its 205.0 year-7 mark rather than realising 225.0 in year 8: LP distributions fall from 848.0000 to 832.0000 and DPI from 1.6960x to 1.6640x
What happens to the rate	Net IRR rises from 11.9825 percent to 12.1946 percent, because 205.0 arrives a year earlier
What happens to the carry	15.0800 of carry is paid in year 7 that would otherwise have waited, and total carry falls from 87.0000 to 83.0000 because the fund made less
The structural problem	The GP sets the price, advises both sides, and is paid on the outcome

• This is the second case on this site where net IRR and the multiple move in opposite directions, and the mechanism is identical to the subscription facility: cash arrives earlier and less of it arrives. An LP presented with a continuation vehicle should ask for the effect on DPI, not on IRR.
• The rolling LP is usually offered status quo terms and the crystallisation of carry happens anyway on the cashing-out LPs' share. A roll is therefore not a neutral election - it changes the carry position of the asset even for the LP that did not sell.
• The two questions that resolve most of the conflict are whether a genuine third-party price was tested and who paid the transaction costs. A process run with a single bidder that also anchors the price is not a price, and transaction costs charged to the selling fund are a further transfer.

A fund-level NAV facility and what it does to reported metrics

Borrowing secured on the fund's portfolio, rather than on uncalled commitments. Where the proceeds are distributed, DPI rises without any realisation, RVPI falls by less than the distribution net of the debt, and the LP moves behind a secured lender.

Field	Value
Formula	After drawing and distributing an amount B against NAV: DPI rises by B/PIC; RVPI becomes (NAV - B)/PIC; TVPI is unchanged. LP look-through leverage on the remaining portfolio = NAV/(NAV - B)
Worked, 25 percent LTV at year 6	Draw 0.25 * 615.0 = 153.750 and distribute it. DPI rises from 0.2872x to 0.6026x; RVPI falls from 1.2615x to 0.9462x; TVPI stays at 1.5487x
Look-through leverage	615.0/461.25 = 1.3333x on the remaining portfolio
Loss position	A 25.00 percent fall in portfolio value leaves the lender whole and the LP's equity in the remaining portfolio at nothing
The tell	TVPI is unchanged in every row of the table. A distribution that raises DPI without raising TVPI did not come from a realisation

• TVPI being invariant to the facility is the cleanest available test. Reconcile every distribution to a named realisation; if DPI moves and TVPI does not, the cash came from somewhere other than a sale.
• The facility is not automatically adverse. Financing a follow-on at the fund level can be cheaper than calling capital, and bridging a distribution around a bad market can be genuinely value-accretive. Financing a distribution to improve a metric during a fundraise is a different transaction wearing the same documents.
• The disclosure question is not the loan-to-value but the portfolio decline at which LP equity is impaired, which is simply the LTV expressed the other way round. At 25 percent LTV that is a 25 percent decline, and it is a number no reporting template requires anyone to state.