Core LPA provisions for private equity funds

The limited partnership agreement (LPA) of a private equity fund structured as a partnership, deemed the constitutional document for the fund, is typically negotiated and determined by all partners at the stage when the fund is being raised. Preparations and negotiations leading to the conclusion of the LPA constitute a process where the general partner (GP) and limited partners (LPs) fight against each other for an arrangement that is in the best interest of each side.

The GP of a partnership fund has the discretion to make investment decisions for the fund independently, while LPs account for a lion’s share of capital commitment to the fund without being involved in the fund’s operation or management. In order to prevent the GP from abuse of power that might be detrimental to the LPs’ interest, and to encourage it to seek maximized return for the fund, the LPA governing the partnership between the GP and LPs, especially provisions relating to alignment of interests between the GP and LPs and those about fund governance and information disclosure, must be properly drafted. In the sections below we will see how LPs can protect their interest by ensuring proper drafting of core provisions in the LPA.

ALIGNMENT OF INTERESTS

Alignment of interests between the GP and LPs, an issue of utmost importance to be addressed under the LPA, involves core provisions that include, but are not limited to, those related to capital contribution from the GP to the partnership, management fee arrangements, and distribution of earnings.

Liu Hui is a partner at Boss & Young