A closer look at ‘investor-friendly’ terms in the model LPA

In this extract from a note to clients, Michael Sabin, a private funds lawyer in Clifford Chance's New York office, talks through 14 of the more LP-friendly terms in the model agreement.

Noteworthy investor-favorable terms included in the ILPA Model LPA:

  • In addition to featuring a “whole-of-fund” waterfall and clawback at the end of the fund’s life, there is a requirement to establish an escrow account for carried interest distributions and calculate the clawback at various interim stages during the fund life.

    Michael Sabin Clifford Chance
    Michael Sabin
  • The general partner must make decisions, including investment decisions, reasonably and with the care that an ordinarily prudent person in a like position would exercise under similar circumstances, and any exercise of its discretionary authority under the LPA (including “sole discretion”) must be exercised in a manner consistent with this standard of care. This standard of care applies in addition to any fiduciary duties applicable under applicable law or the relevant regulatory framework.
  • The preferred return begins accruing upon a drawdown on a subscription facility.
  • The authority to enter into side letters is limited to the general partner’s reasonable discretion.
  • Side letters with individual investors are treated as a part of the LPA for certain purposes, e.g. non-compliance with side letters results in consequences identical to non-compliance with the LPA.
  • Disclosure of conflicts to fund investors prior to their investment in a fund does not waive the conflict or otherwise reduce or eliminate the requirement for the investor advisory committee to consent to a conflict of interest.
  • “For cause” removal includes a breach of the standard of care, does not always require a material breach of an obligation and does not require the fund to suffer any financial loss, and it is optional whether a court must make the finding of cause (and a final determination is not required). In addition, a “for cause” removal results in an immediate and full forfeiture of carried interest.
  • “For cause” removal includes a key person’s misdemeanor criminal offense (even if only punishable with a fine) and the conduct need not be related to or material to its duties to the fund.
  • No management fee is payable during the liquidation period, any extensions to the fund’s term or any key person suspension period.
  • Investors have multiple no-fault remedies, including termination of the investment period, general partner removal and fund termination.
  • Investors have relatively broad rights to be excused from investments.
  • As is customary, organizational expenses are subject to a cap; however, the cap is the lower of a percentage of fund commitments and a fixed amount.
  • There is no flexibility to form supplemental capital vehicles such as managed accounts or overflow funds.
  • All side letter provisions must be disclosed to all investors and the “most favored nation” provision is included in the LPA, as is more common outside the US, making it available to all investors. The “most favored nation” right is not size-based and has limited exceptions, and operates automatically (eg, without elections required by investors).

The full note can be found here on Clifford Chance’s website.