🛠️ Investment Fund Key Terms, Part 10

🎉 Happy Friday, funds family!

Today, we have Part 10 in our many-part series walking through each term in an investment fund term sheet in detail.

Last week, we discussed 🛠️ Capital Recycling. 

Here’s the index of each article in this series (so far):

• Part 1: Naming your entities

• Part 2: Investment objectives

• Part 3: Fund size

• Part 4: LP minimum check size

• Part 5: GP commitment

• Part 6: Fund term

• Part 7: Fundraising period

• Part 8: Investment period

• Part 9: Capital recycling

Today, we'll learn about Investment Limitations. 

Every private fund has a defined investment objective – we discussed this in Part 2 of this series.

🛑In addition, some funds have hard-coded “investment limitations” provisions that regulate the specific investments funds are legally permitted to make.

Here’s what an investment limitations clause might look like:

➡️ Why do investment limitations exist?

They serve two main purposes:

1. Risk control: LPs want to ensure diversification and avoid overexposure to a single asset or borrower.

2. Strategy alignment: LPs commit capital based on a defined thesis (venture capital, real estate, credit, etc). In some cases, funds are also tied to certain geographic areas. Investment limitations prevent the GP from drifting into unrelated strategies or markets.

In many cases, investment limitations are baked right into the LPA. In other cases, large investors might have side letters with their own particular investment restrictions. Side letter restrictions are especially common for “off-limits” industry investments like weapons or tobacco. 🔫 

➡️ Common limitations include:

• Concentration limits: Caps on exposure to any one investment (e.g., no more than 10–25% of commitments in a single deal).

• Investment Vehicle limits: Restrictions on investing in other funds or syndications that charge management fees and/or carried interest.

• Industry restrictions: Prohibitions on pornography, weapons, or fossil fuels.

• Asset-class restrictions: Prohibitions on public equities, crypto, derivatives, or other non-core assets.

• Jurisdictional limits: Restrictions on foreign investments or certain geographies.

➡️ How strict are these rules?

It depends on the strategy. A venture fund may have broad flexibility (“primarily invest in early-stage technology companies”), while a credit or real estate fund may have highly specific caps on leverage, collateral types, or property classes.

In addition, the limited partners (either directly or through the limited partner advisory committee) can usually waive a particular investment limitation if requested by the GP. 👋 

🗓️ Next up in Part 11: Leverage Limitations

Thanks for reading, everyone.

Have a great weekend! 🙌 

⚠️ Note: This newsletter is for informational purposes only and nothing should be considered legal advice. For that, hire a lawyer! I am a lawyer, but not your lawyer (unless I actually am your lawyer because you’ve signed an engagement letter and we’re working together). This newsletter may be considered attorney advertising.