As we know from the article “Who is GPs and LPs?” a Limited Partnership Agreement (LPA) is an agreement signed between GPs and LPs to establish a PE Fund. The main purpose of this document is to regulate terms and conditions of cooperation among the Partnership and set the guidelines for investments. In my article today I will discuss the main parts of a LPA.
Usually this is the first part of each agreement. The purpose is to bring all parts of the agreement to a common understanding of the terms used in the agreement. Thanks to that the risk of misinterpretation is minimized.
2. Basic regulations
This part briefly describe:
- Compliance of agreement with other documents, especially with applicable law
- Name of the Fund
- Purpose of the partnership
- Commencement and duration of the partnership
- Principal place of business and investments – which is always specified place
- Minimum and maximum size of the Fund
3. Rights and duties of the Manager
Each Fund has to have its own Manager elected by all the Partners. In some cases GP itself acts as Manager. This section regulates a Manager’s authority, his powers and replacement. Additionally, it can regulate the powers and duties of a GP who is responsible for the supervision of the Manager. A management fee is paid to the Manager for his work. Fees and expenses are divided by reference to total commitment of each of the Partners.
4. Capital contribution
This section describes the contribution of the Partners, especially the schedule of payment for LPs as well as the Fund closing regulations. It also determines the conditions for Manager/ GP to raise additional capital and the provisions for LPs who do not meet the schedule.
5. Investment policy guidelines
This paragraph is related to point 3. It regulates a Manger’s/ GP’s investment policy. Guidance may concern place of investment, type of investee company (mainly sector), conditions under which there is no investment allowed and others such as concerning compliance with applicable law.
6. Allocation of liabilities, profits and losses
The aim of this paragraph is to set the rules of allocation of liabilities, profits and losses. Most important is the allocation of income, capital, and losses, but also expenses and tax credits. A paragraph determines the order of allocation between the Partners. What is more, this paragraph stands for limited liability of Limited Partners.
Distribution concerns allocation of liabilities, profits and losses. Primarily, set a time and conditions of distribution for each of the Partner.
8. Assignment of interests
This section regulates the condition under which each of the Partners can sell, assign, transfer, exchange, pledge, encumber or other disposition, or grant of any participation of all or any part of their interest in the Partnership. As a rule a General Partner is not allowed to divest of his interest. Limited Partners are allowed to do it, however, only if they receive written Manager/ GP permission.
9. Termination and liquidation
Termination means the expiration of the Partnership. This part lists conditions that cause termination. Typically it is certain period of time, e.g., 10 years after Initial Closing Date (last day of raising the capital for the Fund) or others like, e.g., circumstances like bankruptcy, insolvency, dissolution, liquidation, resignation, and withdrawal of the Manager/ GP.
Liquidation refers to the endings of the affairs of the Partnership, and to dividing the Partnership Assets among the Partners. The part sets conditions of conducting this liquidation.
10. Meetings of LPs and the Advisory Board
The agreement schedules the meeting of LPs with the Manager and GP. Generally it is at least two times per year. If Partnership has an Advisory Board (represent the interests of LPs), this section also schedules their meetings and tasks, e.g., reviewing annual Fund valuation or reviewing investment objectives, strategy, and performance.
This paragraph is at the end of each agreement. Generally it collects all records that cannot be assigned to other parts but has to be contained in the agreement. For example:
- Investment opportunities – regulates relation with other investments/ investors
- Governing Law