🛠️ Investment Fund Key Terms, Part 26

🎉 Happy Friday, funds family!

Today, we have Part 26 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):

This week focuses on Limited Partner Advisory Committees.

Most private funds have a committee of LPs called the Limited Partner Advisory Committee ("LPAC"). That said, the LPAC's function is often misunderstood by newer GPs and LPs. 🏛️

➡️ What is an LPAC?

An LPAC is typically made up of 3-7 significant LPs. It often comprises the GP's favorite LPs (and those committing the most capital). Members are appointed by the GP (sometimes subject to size or strategic criteria).

In many cases, LPs affiliated with the GP are ineligible to be on the LPAC. In some cases, non-US LPs might be excluded from the LPAC due to CFIUS concerns.

The LPAC's core function is to oversee conflicts of interest and protect the integrity of the fund's governance process.

➡️ What does the LPAC typically approve?

Common LPAC matters include:

• Conflicts of interest

• Cross-fund allocations

• GP-led secondaries

• Key person determinations

• Valuation issues

• Extensions of the fund term

• Waivers of certain LPA provisions

An example might be the GP or an affiliate warehousing a deal and selling to the fund at fair market value.

➡️ What the LPAC is not

The LPAC does not:

• Manage the fund

• Approve investments (in most funds)

• Impinge on the general authority of the GP

If LPs want true control rights, that must be negotiated separately.

➡️ Practical dynamics

In general, LPAC members do not owe fiduciary duties to the fund (or the other LPs). In addition, LPAC members:

• Receive more information

• Have access to the GP

• Influence how gray areas are handled

• Are typically indemnified by the fund for fund-related business

Matters to be approved by the LPAC can also typically be approved by a majority in interest of the LPs at large.

The LPAC is helpful to the GP because it makes getting approval less burdensome – the GP can poll the 3-7 LPAC members instead of the full corpus of LPs.

⏩ Next up in Part 27: GP Removal

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.