Beyond fees and carry, a fund's agreement governs who must stay, how capital can be reused, what happens if LPs lose confidence, and what you are entitled to know.
12 min read · Level 5
Fees and carry get all the attention in fund selection because they are easy to compare. The clauses that decide what happens when a partner leaves, when LPs lose confidence, or when a conflict arises get far less, and they are the terms that matter in exactly the situations an LP cannot walk away from. Ten years is a long time to discover you never read them.
A limited partnership agreement runs to many pages, and a handful of clauses carry most of the practical weight:
Clause What it governs Key person what happens if named individuals stop working on the fund Investment period how long the fund may make new investments Recycling whether returned capital can be reinvested rather than distributed No-fault divorce whether LPs can suspend or end the fund's investment period by vote Removal for cause removing the manager for defined misconduct LP advisory committee LP representatives consulted on conflicts and valuations Reporting what information you receive and how often Clawback how excess carry is returned and what secures it
Key person provisions matter because you are backing specific people. A typical clause suspends new investments if named partners cease to devote substantially all their time to the fund, giving LPs a chance to reassess.
Recycling allows a fund to reinvest early proceeds rather than distributing them, often up to a stated percentage of commitments. It can increase the capital put to work - sometimes 110% or 120% of commitments - and it also delays distributions and increases fees paid over the fund's life.
No-fault divorce lets a supermajority of LPs end the investment period without alleging wrongdoing. It is rarely used and valuable precisely because it exists.
The LP advisory committee is consulted on conflicts, valuation policies and extensions. Individual LPs in smaller funds rarely sit on it, but its existence and composition tell you how conflicts will be handled.
Because fees and carry describe the normal case, while these clauses govern the situations that actually damage LP outcomes: a key partner leaving, a manager investing beyond their competence, or conflicts being resolved without scrutiny.
They are also difficult to assess after committing. An LP cannot exit, so the agreement is the entire extent of their protection for a decade.
Educational, not personalised financial advice. Nothing in the Investor Academy is a recommendation to buy, sell or hold anything — what is right for you depends on your own circumstances and the rules where you live.
A key person clause used. Two years into a fund's life, one of the two named partners left to start another firm.
Step Outcome Key person event triggered new investments suspended automatically LPs consulted over 90 days manager proposed a replacement partner Vote held LPs approved resuming with revised terms Result fund continued with a reduced fee and one new named partner
Without the clause, the manager could have continued investing the remaining commitments with a different team from the one LPs had backed.
Evaluating a fund on fees, carry and track record while treating the partnership agreement as boilerplate.
Check who is named, what triggers it and what LPs can do when it fires.
Find the maximum percentage of commitments that can be invested and how it affects fees and distributions.
Look for no-fault divorce, removal for cause and an advisory committee, and note the voting thresholds.
Confirm what you will receive, how often and whether valuations are independently reviewed.
Ask whether it is backed by personal guarantees or escrowed carry.
Before committing to any fund, and when a manager proposes amendments to an existing one.
Do not expect to negotiate these terms as a small LP in an oversubscribed fund. The realistic use is deciding whether to commit at all.
The Institutional Limited Partners Association publishes principles covering fund terms, including key person provisions, no-fault removal rights, advisory committee practice and reporting standards, which many institutional investors use as a reference when reviewing partnership agreements.
Published industry principles give a useful benchmark for judging whether a fund's terms are within normal practice.
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