The Limited Partnership Agreement: Key Terms and How They Work

The limited partnership agreement (LPA) is the contract that creates and governs a private fund organised as a limited partnership. It sets out how much the general partner can charge, how profits are split, how capital is called and returned, what the GP may and may not do, and what rights the limited partners hold. Every partner signs on to the same LPA, and individual variations are handled through side letters.

For lawyers, the LPA is a negotiated document. For fund CFOs and administrators, it is an operating manual: almost every number that leaves the back office should trace back to a clause in it.

Where the LPA fits among fund documents#

If the PPM summary and the LPA differ, the LPA governs. Most US private funds are Delaware limited partnerships governed by the Delaware Revised Uniform Limited Partnership Act, which gives wide freedom of contract. Cayman exempted limited partnerships are common for offshore vehicles.

Core sections of an LPA#

Formation, purpose and term#

The opening sections name the partnership, its purpose (usually broad), its principal office and its term. The term is typically around ten years for a closed-end private equity or venture fund, with extensions of one or two years at GP discretion or with LPAC or LP consent. The investment period, during which the fund may make new investments, is usually the first several years. After it ends, capital can generally be called only for follow-ons, fees, expenses and commitments made earlier.

Capital commitments and contributions#

This section defines how capital calls work:

• Notice period (often around ten business days).
• What a call may be used for: investments, fees, expenses, and in some cases repayment of a subscription line.
• How amounts are allocated, normally pro rata to unfunded commitments, adjusted for excused or excluded investors.
• Recallable distributions: which distributions can be called again and for how long.
• Default remedies: interest, withholding of distributions, forced sale, forfeiture.

Subsequent closings#

Funds usually hold several closings over a fundraising period. LPs admitted later typically pay an equalisation amount so that every LP ends up having contributed the same proportion of its commitment, often with an additional interest-like charge paid to earlier investors. The LPA sets the final closing deadline and the charge rate.

Management fees and expenses#

The LPA defines the management fee rate, the fee base (often commitments during the investment period, then invested capital or net invested capital after), the payment frequency, and any fee offsets: the share of transaction, monitoring or director fees received by the manager that reduces the management fee.

Equally important is the expense allocation. The LPA lists which costs the fund bears (legal, audit, administration, deal costs, broken-deal costs, insurance) and which the manager bears (overhead, salaries). Organisational expenses are usually capped, with any excess borne by the manager or offset against fees.

Allocations and distributions#

This is the economic core. It defines:

• How profits and losses are allocated to capital accounts for book and tax purposes.
• The distribution waterfall: whole-of-fund (European) or deal-by-deal (American).
• The preferred return rate and whether it compounds.
• GP catch-up percentage.
• Carried interest percentage.
• Clawback: the GP's obligation to return excess carry at the end of the fund, and whether it is net of taxes.
• Tax distributions to the GP, if any.
• Distributions in kind and how they are valued.

Worked example: reading a waterfall clause#

Suppose the LPA provides an 8% compounded preferred return, a 100% GP catch-up and a 20% carry on a whole-of-fund basis. Assume LPs have contributed $100M, held for an effective period that produces a cumulative preferred return of $26M, and the fund distributes $180M in total.

Totals: LPs $164M, GP $16M. The GP's $16M equals 20% of the $80M total profit, which is what a full catch-up is designed to produce. If the back office applies the wrong compounding convention or the wrong catch-up base, these numbers move, which is why the waterfall must be modelled from the LPA text itself.

Management and governance#

• GP authority and any limits on it.
• Investment restrictions: concentration limits, geographic or sector limits, borrowing and guarantee limits, restrictions on investing in affiliates' funds.
• Key person provisions and what happens if they are triggered.
• LPAC composition and the matters it reviews: conflicts, valuation questions, certain waivers.
• Removal of the GP for cause and, in some funds, without cause by supermajority.
• Standard of care, exculpation and indemnification for the GP and manager.

Under Delaware law the LPA may restrict or eliminate default fiduciary duties, but not the implied contractual covenant of good faith and fair dealing (6 Del. C. §17-1101(d)). LPs should read these provisions closely.

Transfers and withdrawals#

LP interests generally cannot be transferred without GP consent. The LPA sets the conditions, typically including tax and regulatory protections (avoiding publicly traded partnership status, preserving 3(c)(1) or 3(c)(7) eligibility, ERISA limits). These clauses matter in secondary transactions.

Reporting, books and records#

The LPA sets reporting obligations: quarterly unaudited reports, annual audited financial statements, capital account statements and tax information, each with a delivery deadline. Many LPs now ask for reporting aligned with ILPA templates, often secured through side letters.

Amendments, dissolution and miscellaneous#

Amendment thresholds (often a majority or supermajority in interest of LPs, with certain changes requiring each affected LP's consent), dissolution triggers, the liquidation process, governing law and dispute resolution complete the agreement.

Market standards and the ILPA model#

The Institutional Limited Partners Association has published a model LPA and principles that many LPs use as a negotiating reference. Few funds adopt it wholesale, but it is a useful benchmark for what institutional investors expect on transparency, fees and governance.

Making the LPA operational#

A signed LPA is only useful if the back office follows it. A practical approach:

1. Abstract the LPA at first close. List every operational term: fee rates and bases, offsets, pref rate and compounding, catch-up, carry, notice periods, reporting deadlines, investment limits, expense caps.
2. Layer side letters on top. Record each LP-specific modification and every MFN election.
3. Configure systems from the abstract. Fee, waterfall and allocation engines should use the abstracted terms, with a reviewer signing off.
4. Recalculate at each close. Check fees and allocations against the abstract every period, not just at year-end.
5. Track amendments. Every LPA amendment or new side letter updates the abstract, with an effective date.
6. Keep the evidence. Auditors and LPs will ask how a number was derived; keep the calculation and its LPA reference together.

How Privatis helps#

Privatis turns LPA terms into working calculations: management fee calculation, capital calls and distributions with waterfall calculations, and a double-entry ledger with period close. Side letter and MFN election tracking sits alongside the LPA terms, and the audit trail records every change so each figure can be traced back to its source.