🛠️ Investment Fund Key Terms, Part 25

🎉 Happy Friday, funds family!

Today, we have Part 25 in our many-part series walking through each term in an investment fund term sheet in detail.

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

• Part 10: Investment limitations

• Part 11: Leverage Limitations

• Part 12: LP Withdrawals

• Part 13: Key Person Event

• Part 14: Successor Funds

• Part 15: Carried Interest

• Part 16: Preferred Returns

• Part 17: GP Catch-Up Provisions

• Part 18: American vs. European Waterfalls

• Part 19: Split Waterfalls (Cash Flow / Dispositions)

• Part 20: Carried Interest Clawbacks

• Part 21: LP Giveback

• Part 22: Management Fees

• Part 23: Fees paid to GP Affiliates

• Part 24: Fund Expenses vs. GP Expenses

This week focuses on LP Defaults.

What happens if an LP doesn’t fund a capital call? 🚨

It’s rare, but it happens. And it can be very disruptive to a fund that relied on the LP funding its capital commitment.

➡️ What is an LP Default?

An LP default occurs when a limited partner fails to fund all or part of a capital contribution when due.

Funds rely on committed capital to:

• Close investments

• Pay expenses

• Support porfolio companies, investment properties, etc.

If one LP doesn’t fund, the fund still has obligations. The shortfall can be critical.

➡️ What are “GP expenses”? 💰

GP expenses are costs associated with running the sponsor’s business, not the fund.

These are typically paid by the GP or management company and not charged to the fund.

Common GP expenses include:

• Principal and employee salaries, bonuses, and benefits

• Office rent and overhead

• GP-level technology and software

• GP-level accounting and tax returns

• Legal costs unrelated to fund operations

If the expense exists even without the fund, it’s usually a GP expense.

➡️ Why it matters 🗝️

Private funds are built on contractual commitments, not deposited cash.

A single default can:

• Force additional capital calls on other LPs

• Delay or jeopardize investments

• Require bridge financing

• Shift risk to non-defaulting investors

➡️ Common remedies 💊

Well-drafted LPAs typically include:

• Default interest

• Loss of voting rights

• Forced sale at a discount

• Dilution

• Forfeiture of rights or economics

• Legal action

There is usually a short cure period (often 5–10 business days). After that, penalties escalate.

These provisions are meant to deter default (and they usually do).

➡️ Practical reality

True defaults in institutional funds are uncommon. Reputation matters.

But in smaller funds or volatile markets, risk increases, and the default section suddenly becomes very important.

LPs: Don’t sign up for a fund commitment if you can’t perform. The consequences can be fire.

GPs: Ensure your fund documents have clear, comprehensive default provisions.

⏩ Next up in Part 26: Limited Partner Advisory Committees

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.