Limited Partnership Agreements: Minor variations can have a significant impact on fund administration
By: Jon Haidet
Often 60-100 pages and thousands of words, Limited Partnership Agreements (“LPAs”) act as the legally binding agreement between the general partner (“GP”) of an investment fund and its investors, the limited partners (“LPs”). From an administrator’s perspective, LPAs act as a roadmap guiding us on the path through the full fund life cycle; from the structuring and purpose, through investment restrictions and mechanics for calling and distributing capital, to the final termination and liquidation. Minor variations in the language of the LPA can have a significant impact on the administration of the fund and ultimate return to each investor.
Take for example these variations in compounding language describing a preferred return calculation:
- “compounded annually”
- “compounded annually on the anniversary of each drawdown date”
- “compounded annually at the end of each fiscal year”
While the first and third examples are often interpreted to be the same, a discussion and determination should be had between administrator and GP as to the intent of “compounded annually” absent the additional clarifying language. The second and third examples clearly describe different compounding dates and the results will differ. The complexities surrounding preferred return compounding do not stop here, additional variations in language often exist dictating the start date of preferred return calculations and the rate to be used.
While most LPAs follow a consistent format and contain similar sections, there are seemingly infinite variations in language impacting the administration of the fund. Each section of the LPA can contain variations requiring identification and analysis just as presented above. Often, a single word in a document of thousands can have a significant impact.
How we can help
CLA’s fund services team has seen many of these variations in LPAs and has the experience, specialization, and systems to customize our fund administration processes and calculations to your (and your LPA’s) specific needs. We enjoy identifying these nuances and discussing the impact the language or proposed language in your LPA will have on the administration of your fund. Whether your LPA is simple or complex, our fund services team has the experience to help.
Craig Arends is a principal at CLA and is the managing principal of CLA's private equity practice. Craig brings a concentration of experience in providing accounting and transaction structuring advice for leveraged recapitalizations, purchase accounting and SEC reporting, assessing quality of earnings, and GAAP accounting. He has far-reaching experience with critiquing financial models and reviewing target companies' financial performance to identify cost reductions and/or operating efficiencies Craig has more than 30 years of experience in public accounting serving public companies, private equity groups, and companies, including a term as principal in charge of a Big Four Capital Markets Group in Moscow, Russia. He has led financial accounting due diligence projects for private equity investor groups and venture capital funds, primarily in the technology, communications, and manufacturing industries, as well as assisting with Foreign Corrupt Practice Act matters ranging from investigation of payments made, validation of compliance with corporate policies, and review of proposed transactions to ensure compliance. When not working, Craig enjoys watching any sports, but his most favorite are baseball, football and soccer.
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