🛠️ Investment Fund Key Terms, Part 27

🎉 Happy Friday, funds family!

Today, we have Part 27 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 GP Removal.

What happens if the LPs want to kick out the GP? ⚖️

GP removal provisions define how investors can remove the general partner of an investment fund or syndication.

➡️ Two types of removal

Most LPAs distinguish between removal for "Cause" and removal for any reason.

1️⃣ Removal for Cause

Removal for "Cause" typically requires between 51–75% of the LPs to vote.

"Cause" often includes triggers like the below, but the specific definition is often negotiated in institutional funds.

• Fraud or willful misconduct

• Material breach of the LPA

• Criminal conviction

• Regulatory disqualification

2️⃣ Removal Without Cause

Removal without "Cause" is generally a higher bar – often 75%–85% of LPs must vote in favor of removal.

In some cases, removal without "Cause" may be prohibited during the first year or two of the fund's operations (to give the GP a chance). Many funds have no ability for LPs to remove the GP without "Cause" at all.

➡️ Consequences of Removal

Removal often triggers:

• Suspension of investment period

• Termination or reallocation of carry

• Appointment of a replacement GP

• Potential fund shutdown

• Management company removal

➡️ Points to Negotiate

Common negotiated provisions include:

• What constitutes "cause" (GPs want a narrow definition; LPs want a broad definition)

• Voting thresholds (GPs want higher thresholds; LPs want lower thresholds)

• Economic consequences (LPs may request a haircut on carried interest)

• Process and timing (GPs want a right to cure, such as the right to fire the offending person and make the fund whole)

⏩ Next up in Part 28: Warehoused Investments

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.