Real estate is largely a game of Other People’s Money. And when you’re working with OPM, it’s essential you understand exactly what your responsibilities, obligations and rights are. The argot of investment funds is complex and ever-changing, and there’s a lot of misinformation out there. So The Promote did a collab with Michael Huseby, a noted investment funds lawyer and founder of TIL Partners, on an *actually useful* list of terms to know when fundraising for funds or syndications.
There are typically three principal fund-related entities:
1⃣ The Fund itself (the entity that accepts LP capital and makes investments)
2⃣ The General Partner (the legal control party of the Fund and the party that receives the promote)
3⃣ The Management Company (a party that provides investment management services to the Fund and receives management fees)
Most funds follow a somewhat predictable naming convention.
If your “business” name is TIL Capital, for example, your entity names will probably look something like this:
🔹 Fund: TIL Capital Fund I, LP
🔹 GP: TIL Capital Fund I GP, LLC
🔹 ManCo: TIL Capital Management, LLC
But before you form entities, there are a few precautionary steps you should take to make sure your business name is available.
⚠️ Trademark: Run a quick USPTO (trademark) search. This is a good first step to ensure nobody else has a federal trademark regarding a name you want. For a full analysis (including state-level Trademarks), you will want to work with a lawyer.
⚠️ Domain & Digital: Is the domain name available? What about social media handles?
⚠️ Secretary of State: Check with your preferred state of formation (usually Delaware) to see if all the legal entity names are available. You can reserve a name for the future if you’re not ready to form entities today.
All things considered, it’s better to have a somewhat unique name. I can’t tell you how many repeats there are in the industry (peaks, stones, rocks, other things that sound durable).
The investment objective is a short, simple section that describes what the fund plans to do. 📈
Here’s an example:
💬 “The Fund’s primary investment objective is to realize current income and capital appreciation by investing in, managing, and disposing of value-add multifamily properties in Texas.”
No need to overthink it, but there are a few important things to consider:
⚠️ This is not the place to overhype the fund with overoptimistic language. Keep it calm.
⚠️ Always state that you “expect,” “target,” or “aim” to achieve your objectives.
⚠️ If you’re raising a VC fund, make sure to explicitly mention “venture capital” in your investment objective. This is important for fund managers who want to rely on the “venture capital exemption” from the Investment Advisers Act.
Here’s an example from a VC fund:
💬 “The Fund’s primary investment objective is to realize capital appreciation by investing in Series Seed and Series A rounds of private technology companies in Northern California. The Fund intends to pursue a venture capital strategy, primarily investing in direct issuances of operating businesses. However, the Fund may also invest in other venture capital funds, secondary shares of companies, and digital assets.
Finally, you could specify the target size of your investments. For example, a private equity fund might say it’s targeting companies with EBITDA of $10-20M
The fund size is essentially a marketing term signaling how much capital a fund or syndication seeks to raise. 💰
As a general rule, the fund size is just a target, and is not legally binding.
However, sometimes guardrails do exist:
⬆️ Caps. Some funds have a cap on the total capital the fund can raise. LPs sometimes request caps so the GP doesn’t raise too much money and start deploying capital indiscriminately. For example, a fund with a $200M target might have a cap at $250M
⬇️ Floors. Less common, but sometimes funds have a minimum viable capital raise. If the GP can’t raise a certain amount of money (let’s say $50M out of a $150M target), the fund can’t hold an initial closing.
As a side note, anchor LPs sometimes have “ratcheting” commitments that are tied to the fund size. For example, an LP’s commitment might be the lesser of $10M and 25% of the fund.
⚖️ Another thing to consider is the fund size’s effect on your exemptions from securities laws. In many asset classes (private equity, private credit, and others), managers must register with the SEC as “Registered Investment Advisers” once their regulatory assets under management exceed $150M. As a result, some emerging managers target less than $150M for their first fund so they can avoid extra regulatory scrutiny (until they raise Fund II).
So how much money should you raise? What’s normal?
A common progression for first-time GPs looks something like the following:
1️⃣ Fund 1: $10-50 M
2️⃣ Fund 2: $50-150 M
3️⃣ Fund 3: $150M+
In practice, fundraising targets are all over the place, and many GPs simply raise “as much money as they can” 😊
Fund and syndications typically have a “minimum commitment.” Basically, the fund will reject check sizes lower than that threshold. 💸
Except…that’s not what really happens. Many fund documents say something like this:
🗨️ “The minimum investment is $250,000; provided that the General Partner may accept lesser amounts in its discretion.”
In other words, there’s often no *real* legal minimum check size. And many funds will accept at least a few investors below the minimum threshold. Friends, family, and advisors are examples of people who might squeeze through with smaller investments.
However, the GP doesn’t want to accept checks of all sizes. They need to draw the line somewhere.
Why?
🙀 Herding cats.
Dealing with 100 LPs is a lot more work than dealing with 10 LPs.
Each LP needs K-1s, financial statements, and calls letting them know they’re important.
Imagine quarterly calls with 100 LPs…that’s 400 calls a year. Plus, some funds have hundreds or even thousands of investors.
That may be fine if you’re managing $2 billion, but it would be unsustainable if your fund is $2M.
⚖️Regulatory.
Many types of funds and syndications (those relying on the 3(c)(1) exemption from the Investment Company Act) are capped at 100 investors.
You don’t want to fill up your golden 100 slots with tiny checks. Have some standards!
🫣 What’s the most ridiculous check size I’ve ever seen? When raising a VC fund a couple of years ago, an LP tried to commit $2,000 to a $50 M fund. Alas, the GP declined to accept such an investment.
The last thing to note is that many LPs will invest the minimum. If you’re on the fence between two potential minimum thresholds, choose the higher one. Remember, you can always waive it.
The GP often commits to invest alongside the LPs in funds and syndications. LPs like to see a healthy GP co-invest amount, as it aligns incentives and ensures the GP has skin in the game.
Here’s an example of how this might be written:
💬 The GP and its affiliates shall make aggregate Commitments to the Fund of at least 3% of the aggregate Commitments.
➡️ How much should the GP invest?
In multi-asset funds, the GP usually invests somewhere between 1-5% of the total fund size. Obviously, the more the better (from the LPs’ perspective). In some rare cases, the GP doesn’t commit any capital.
In single-asset syndications, the GP often invests somewhere in the 5-10% range. The total amount of the raise is usually smaller on single-asset deals, so the absolute dollar value of the GP commitment is less than in multi-asset funds.
The above are just general guidelines – GP commitments in any particular deal might be higher or lower.
➡️ Does the GP pay fees and carried interest?
In many funds and syndications, GP capital does *not* pay management fees or carried interest. However, in a minority of funds, the GP pays fees, carry, or both.
➡️ How does the GP fund their commitment?
There are three primary ways GPs can fund their co-invest amount:
1️⃣ Cash. This is the simplest way. The GP contributes cash pursuant to capital calls, the same way LPs fund their cash commitments.
2️⃣ Property. GPs sometimes fund their commitment by contributing property to the fund or syndication. For this to work, the property must be *exactly* the type of property the fund is investing in. For example, a California multifamily fund could accept an apartment building in SF, but it could *not* accept Series B Stock of a technology startup.
3️⃣ Fee Waivers. Some GPs fund a portion (but usually not all) of their commitment by waiving management fees (or other fees) over the fund’s life. For example, if the GP is entitled to $100 of fees each quarter, it could elect to take only $80 in cash and get “profits interest” credit for the $20 difference. This is a complex move with tax consequences, so please work with a lawyer.
The term is the fund’s lifespan. At the end of the fund’s term, it liquidates its assets and winds down.
A standard fund term might look like this:
💬 The Fund will be dissolved on the tenth anniversary of the Final Closing Date, or such earlier time as determined by the General Partner in its sole discretion or set forth in the Fund Agreement; provided that, unless the Fund is earlier dissolved, the term of the Fund may be extended beyond such date by the General Partner in its sole discretion for up to two years, and for up to one additional year thereafter with the consent of the LPAC or a majority in interest of the Limited Partners. The Fund’s term is subject to early termination upon certain circumstances as set forth in the Fund Agreement.
➡️ How long do fund terms last?
In most closed-end funds, the fund’s term is somewhere between 5-10 years, with 10 years being very common for illiquid strategies like venture capital and private equity.
The 10-year timeline often comes with some wiggle room. Most LPAs give the general partner discretion to extend the fund’s life for a year or two. Plus, the LPs can further agree to extend the fund’s term.
➡️ Are LPs locked in?
During the fund’s term, as a general rule LPs *can’t* withdraw their capital – they’re locked in. The general partner may facilitate redemptions or transfers in special cases, but LPs shouldn’t count on it.
In some cases, the LPs might have a “termination right” to end the fund’s term early. Examples might include the right for 80% of LPs to terminate the fund for any reason, or the right for 51% of LPs to terminate the fund if the GP did something really bad (fraud, gross negligence, etc.).
➡️ What about open-ended funds?
Open-ended (or “evergreen”) funds don’t have a fixed term at all – they last forever!Unlike closed-end funds, open-ended funds *do* typically have a mechanism for LPs to withdraw capital from the fund, subject to guardrails.
In most closed-end funds, the GP has a fixed window to raise capital. The fund begins operations on the “initial closing date” – the date the first LPs are admitted to the fund.
Then, at some point in the future, the fund holds the “final closing date” – the date that fundraising ends.
A standard fundraising period might look like this:
💬 The initial closing of the sale of limited partnership interests in the Fund (the “Initial Closing Date”) will be held on January 1, 2026. Additional Commitments may be accepted and subsequent closings may be held at the discretion of the General Partner for a 12-month period following the Initial Closing Date, subject to an extension of up to 6 months at the discretion of the General Partner or such later date as approved by the LPAC or a majority in interest of Limited Partners (the “Final Closing Date”).
➡️ How long is the fundraising period?
In most closed-end funds, the fundraising term is around 12 months. In addition, the GP can usually extend the fundraising period in its discretion for around 6 months.
Recently, we’ve seen some GPs try to push the extension period to 12 months to give them more wiggle room.
In addition to the GP extensions, the LPs (either as a full group or via the Limited Partner Advisory Committee) can usually vote to extend the fundraising window.
We saw a decent amount of funds do this in 2022-2023, as fundraising became tight following the historic Fed interest rate hikes.
➡️ What happens after the fundraising period ends?
Once the fundraising period ends, the fund can no longer accept new investors.
The fund focuses on making, monitoring, and selling investments.
Note that the fund *does* typically make investments during the fundraising period.
It’s a busy time, with the GP often investing and fundraising simultaneously.
➡️ What happens to LPs who join after the initial closing date?
In short, LPs joining late will have to fund a capital call such that all LPs have funded the same portion of their commitments.
This is an *equalization* payment. In addition, many fund agreements require late LPs to pay earlier LPs interest on the equalization payments (often at Prime +2).
This interest charge is to compensate the earlier LPs for the time value of money and the fact that the early LPs took more risk by investing with less information when the fund was newly formed.
➡️ What about open-ended funds?
In most open-ended funds, there is no fundraising period. The fund can typically accept new investors forever, usually at pre-determined intervals such as monthly or quarterly.
A fund’s “investment period” is the phase when the GP is authorized to deploy capital into new investments.
A standard investment period might look like this:
💬 The period during which the Fund may make new Portfolio Investments (the “Investment Period”) shall commence on the Initial Closing Date and shall continue for four (4) years thereafter, subject to extension by up to one (1) year at the discretion of the General Partner or such longer period as approved by the Limited Partner Advisory Committee (the “LPAC”). Following the expiration of the Investment Period, the Fund may make follow-on investments in existing Portfolio Companies but shall not make new investments without LPAC consent.
➡️ How long is the investment period?
Most closed-end funds set an investment period of 3-5Y from the fund’s initial closing date. The specific timeline often depends on the strategy and asset class.
As with the fundraising period and the fund’s term, GPs sometimes retain the right to extend the investment period by 6–12 months.
➡️ What happens when the investment period ends?
When the investment period ends, the fund stops making new investments.
However, the GP can generally:
But the GP cannot initiate new investments — unless approved by the LPAC or a majority of LPs.
In short, the fund transitions from its “growth” phase into its “management and exit” phase.
➡️ Why does the investment period matter?
The investment period affects:
➡️ What about open-ended funds?
In open-ended funds, there’s usually no defined investment period. The GP can continuously invest capital as new subscriptions come in and redemptions go out.
When a fund sells or refis an investment, the proceeds are usually distributed back to investors. But sometimes, the GP is allowed to reinvest those proceeds into new deals.
Here’s what a capital recycling provision might look like:
💬 The General Partner may, during the Investment Period, reinvest proceeds received from the sale, disposition, or refinancing of Portfolio Investments in additional Portfolio Investments, provided that such reinvestments occur prior to the expiration of the Investment Period and do not cause total Capital Contributions to exceed 110% of the aggregate Capital Commitments of the Limited Partners.
➡️ Why recycle capital?Capital recycling allows the GP to increase the fund’s impact without increasing commitments. It’s common in strategies where capital can be returned and redeployed quickly (like credit funds), but you might find recycling in any asset class.
For example, let’s say a credit fund makes short-term loans that are repaid within a year. Rather than sending that money back to LPs or keeping idle cash in the fund, the GP can recycle those proceeds into new loans until the investment period ends. Recycling keeps capital working, increases the number of investments, and improves diversification.
➡️ Limits and conditions
Capital recycling isn’t unlimited. Most LPs want to cap it to avoid hidden “fund size creep.”
Typical limits might include:
1️⃣ Timing: Reinvestment is allowed only during the investment period.
2️⃣ Sources: Only proceeds from realized or repaid investments can be recycled.
3️⃣ Amount: Recycled capital cannot exceed the total commitments, or a higher cap, such as 125% of commitments.
➡️ What happens after the investment period?
Once the investment period ends, recycling usually ends too. At that point, proceeds are distributed, not reinvested—unless the LPs or the LPAC expressly approve.
➡️ What about open-end funds?
In open-end funds, unlimited recycling is often the default. If LPs want a return of capital, they can withdraw funds pursuant to the fund’s redemption procedures.
Every private fund has a defined investment objective – see II
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:
💬 Without the consent of a majority in interest of the Limited Partners or the LPAC, the Fund shall not (i) invest more than 20% of its aggregate Capital Commitments in any single Portfolio Company, (ii) invest more than 10% of its aggregate Capital Commitments in Portfolio Companies domiciled or headquartered outside of the United States, or (iii) invest in any blind-pooled vehicle that charges management fees and/or carried interest.
➡️ Why do investment limitations exist?They serve two main purposes:
➡️ 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).
🔹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.
➡️ How strict are these rules?
It depends on the strategy. A venture fund may have very 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.
Leverage can magnify returns, but it also magnifies risk. As a result, many fund docs include clear borrowing restrictions and caps on fund-level debt.
A sample provision:
💬 Unless otherwise approved by the LPAC or a majority in interest of the Limited Partners, the aggregate principal amount of such indebtedness of the Fund for borrowed money outstanding at any time may not exceed 50% of aggregate Commitments (measured as of the date such indebtedness is incurred).
➡️ Why limit leverage?
Leverage restrictions exist to protect LPs and preserve the fund’s risk profile.
Typical uses of leverage include:
➡️ Leverage limits under the Venture Capital Fund Exemption
Under the Investment Advisers Act, a fund that wants to qualify as a “venture capital fund” (and therefore avoid registration as an investment adviser) must meet several tests — one of which directly limits the use of leverage.
Specifically:
In practice, that means:
✅ Short-term subscription lines are typically fine
🚫 Long-term NAV loans or asset-level financing are not
So for venture funds operating under the VC Exemption, leverage limitations aren’t just investor protections – they’re a regulatory requirement.
Can investors withdraw from a fund whenever they want? No!
In most private funds, investors commit capital for the long haul. But not all funds are structured the same. The rules on LP withdrawals depend on whether the fund is closed-end or open-end. Let’s examine both.
🔒 Closed-End Funds: No Withdrawals
In a traditional closed-end fund — like a private equity, venture, or real estate fund — LPs make a capital commitment and remain invested until the fund winds down. That’s because these funds invest in illiquid, long-term assets. Allowing withdrawals would force the GP to sell assets prematurely, disrupting returns and fairness across investors.
💬 Example: “No Limited Partner shall have the right to withdraw capital or require redemption of its Interests, except as required by law or as permitted by the General Partner in its sole discretion.”
As a result, LPs get their money back only through:
1️⃣ Distributions from realized investments
2️⃣ Liquidation at the end of the fund’s term
The illiquidity is by design — it gives the GP time to execute the investment strategy without worrying about redemptions.
♻️Open-End Funds: Periodic Liquidity (with Gates & Lockups)
Open-end funds are different. They’re designed for ongoing subscriptions and redemptions, often used by credit, hedge, or other evergreen vehicles.
But liquidity still comes with guardrails.
Typical features include:
🔒 Lock-up periods: Investors can’t redeem for the first 12–36 months after investing.
🔒 Redemption notice: LPs must give 30–90 days’ notice before withdrawal.
🔒 Gates: The fund can limit redemptions — for example, to 5–25% of NAV per quarter — if too many LPs want to exit at once.
🔒 Suspensions: The GP can temporarily suspend withdrawals during market stress or valuation uncertainty.
These mechanisms protect the fund from a “run on the bank” while still offering periodic liquidity. In general, the *less* liquid the asset class, the more strict the redemption restrictions. So a public equities fund would have softer restrictions than a real estate fund.
What happens if the people running the fund…stop running the fund? That’s where the Key Person clause comes in.
➡️ What is a Key Person Event?
A Key Person Event (fka Key Man Event) occurs when one or more of the fund’s designated “key persons” — typically the founders or lead partners — stop devoting sufficient time to the fund.
Here’s what a provision might look like:💬 “A Key Person Event shall be deemed to occur if any of [John Doe or Jane Smith] cease to devote substantially all of their professional time to the affairs of the Fund and its related entities.”
When that happens, the fund usually stops making new investments. In some cases, the LPs may be able to vote to shut down the fund entirely.
➡️ What are the components of a Key Person provision?- Designation: Names of individuals deemed “Key Persons.”
➡️ What is a Successor Fund?
A successor fund is a new investment vehicle raised by the same manager, typically with the same strategy and target investments as the current fund. If the current fund is “Fund II” in a particular line of funds, Fund II’s successor fund would be Fund III. Please note that to be sophisticated, you must use Roman numerals 🙂
➡️ Why Limit Successor Funds?
Most closed-end investment fund documents have a restriction on successor funds. LPs don’t want the GP forming a successor fund until the current fund is deployed. Otherwise, the GP might focus on the new fund and forget about the current fund.
Here’s what a successor provision might look like in real life:
💬 "Unless consented to by the LPAC or a majority in interest of Limited Partners, during the Investment Period, neither the General Partner nor its affiliates will consummate an investment on behalf of a new blind-pool equity investment fund controlled or managed by the General Partner or an affiliate thereof and that has substantially identical investment objectives, criteria and scope as the Fund."
Note that a closed-end investment fund’s “investment period” is typically roughly the first half of the fund’s life. This is the period when the fund makes new investments.
➡️ What Counts as a “Successor Fund”?
In general, only funds that have the same scope as the current fund count as successor funds. So if the current fund is an early-stage venture fund, only early-stage venture funds would be restricted. Late-stage funds, private equity funds, and funds-of-funds would likely *not* be subject to the successor fund restriction.
This makes sense, as the purpose of the provision is to prevent diverting investment opportunities to the successor fund.
➡️ Allocation Policies
In some cases, a fund’s LPA will contain a provision outlining how investment opportunities will be allocated between the current fund and a successor fund (if formed). This offers additional clarity for LPs in the current fund.
Carried interest is the magical elixir of investment funds – the GP’s share of the profits.
➡️ What Is Carried Interest?
Carried interest is the performance-based portion of the GP’s compensation. You might hear other terms to describe the GP’s share of the profits, including “promote,” “carry,” or “incentive allocation.”
This post will merely contain a general overview of carried interest. Future posts will highlight specific aspects of how carried interest works.
Here’s a (radically) simplified version of how a carried interest provision might work:
💬 “After returning all contributed capital to the Limited Partners, the General Partner shall receive 20% of all subsequent distributions of profits.”
Note that the carried interest is usually described in the “Distributions” section of an investment fund’s LPA.
➡️ What are the components of a carried interest distribution waterfall?
Here are some common terms in carry waterfalls.
1️⃣ Return of Capital: LP must first receive back an amount equal to their capital contributions.
2️⃣ Preferred Return (Hurdle): LP must receive a priority return after the return of capital. Example might be 8%, compounded annually, on the capital contributions of such LP.
3️⃣ Catch-Up: The GP may receive 100% of profits for a short period until the GP has received 20% of all profits distributed (including profits distributed to the LP pursuant to the preferred return).
4️⃣ Profit Split: From that point forward, profits are split 80% to the LP and 20% to the GP.
The above are just examples. In the wild, you’ll find all sorts of splits, percentages, and structures.
➡️ Two Common Structures
Here’s a very simplified explanation of the two principal frameworks for how investment fund waterfalls work:
➡️ Clawbacks & Escrows
If early deals do well but later ones flop, LPs might have overpaid carry. That’s why many LPAs include a clawback mechanism whereby the GP must return any excess carry to the fund. Some LPAs require carry to be escrowed in the fund for a time to cover potential clawback risk.
➡️ Tax Treatment
In the U.S., carried interest may be taxed as long-term capital gains if the fund holds assets for more than 3 years (under §1061 of the Internal Revenue Code). Shorter-term gains? They’re generally taxed at ordinary income rates.
An investment fund or syndication’s preferred return (“pref,” “hurdle,” or “priority return”) is one of the most misunderstood concepts in fund formation.
The preferred return is NOT a guaranteed dividend. It’s simply the LP’s minimum annualized return before the GP can participate in carry.
➡️ What Is a Preferred Return?
At its core, a preferred return is a priority yield on contributed capital. Philosophically, the idea is that the GP shouldn’t earn carry unless LPs have received a baseline return. Otherwise, why not just invest in the S&P500?
Whether it’s 8%, 6%, simple, compounded, or non-compounded depends entirely on the strategy and market norms. The economic effect, though, is the same: LPs get paid a little extra (on top of a return of capital) before the GP gets carried interest.
➡️ Key Components of a Preferred Return
Here are the main variables you’ll see in the wild (and the ones you negotiate constantly):
🔸Rate: Common rates are between 6-12%, but can be higher or lower depending on the asset class. Riskier strategies usually have higher preferred returns.
🔸Compounding: Is the pref compounded annually or non-compounded (simple)?
🔸Ordering: Is the pref the first step in the waterfall, or is it the second step in the waterfall after the “return of capital” step?
🔸Accrual timing: When does the pref “clock” start ticking? Most common is when the capital hits the fund or syndication’s bank account from the LP’s bank account.
➡️ Simple ExampleHere’s the kind of simplified illustration LPs love:
🔸LP invests $1,000,000
🔸Pref = 8% simple
🔸After two years, LPs must first receive $160,000 in preferred return + return of the original $1,000,000
Only then does the GP become eligible to earn carried interest.
If the preferred return is the LP’s “head start,” then the catch-up provision is the GP’s sprint to get back to its intended share of profits.
A catch-up is the mechanism that allows the GP to receive priority distributions for a short phase after the LP has received its preferred return.
➡️ What Is a Catch-Up?
A catch-up is the bridge between the preferred return (LP-friendly) and the final profit split (e.g., 80/20).
The standard formulation looks something like:
💬 “After the Limited Partners have received (i) a return of capital and (ii) the preferred return, the General Partner shall receive 100% of additional distributions until it has received 20% of all profits distributed by the Fund.”
In plain English: The GP gets all of the cash flow for a moment to “catch up” to its carried interest percentage.
➡️ Why Do Catch-Ups Exist?
Without a catch-up, it’s a mathematical certainty that the GP will end up with less than its intended carry percentage (e.g., the 20% in an 80/20 waterfall). This is because the LPs got their referred return (which constitutes the first distribution of profits).
Note that not *all* waterfalls have GP catchups. More LP-favorable waterfalls have a pref but no catchup. However, in institutional funds, catch-ups are quite common.
➡️ Key Components of a GP Catch-Up Provision
Here are the major levers:
🔸 Catch-Up Percentage: This is the percentage of profits the GP gets after the preferred return until the GP is “caught up” to the target carry percentage. The GP often receives 100% of distributions during the catch-up. However, more LP-friendly deals use a partial catch-up (e.g., 50/50).
🔸 Target Carry Percentage: The GP stops receiving 100% once it has received its full carry percentage (e.g., 20%) of all profits distributed to date. If the ultimate profit split is 70/30, the GP would get the catchup until it receives 30% of the profits, for example.
🔸 Deal-by-Deal vs. Fund-Level: In an American waterfall, each deal has its own miniature catch-up. In a European waterfall, the catch-up applies only after the entire fund has satisfied the pref across all deals.
➡️ Simple Example
Assume:
🔸 LP invested $1,000,000 two years ago
🔸 Pref = 8% simple
🔸 GP carry = 20%
After return of capital and the $160,000 preferred return, the next phase looks like:
GP receives 100% of distributions until the GP has received 20% of all profits distributed to both parties. In this case, that would be $40,000 (20% of $160k + $40k).
After the GP “catches up” to 20% of the profits, the waterfall reaches the final 80/20 profit split.
Time to get political (not really, don’t worry).
Today, we'll discuss the two dominant models: (1) the American waterfall (“deal-by-deal”); and (2) the European waterfall (“fund-as-a-whole”).
They can produce dramatically different economics — even with the same preferred return and carry percentages.
➡️ What’s the Difference?At a high level:
🔸 American Waterfall: Carry is calculated deal-by-deal.
🔸 European Waterfall: Carry is calculated only after the LP has been fully returned across all deals.
This seemingly small difference creates massive variations in timing and risk allocation.
➡️ American Waterfall Setup
Under an American waterfall, each investment has its own mini waterfall:
Once a single deal performs well enough to clear its mini waterfall, the GP can receive carry even if other deals are underwater. That’s the positive for GPs.
However, there’s no free lunch. Most fund documents have a “clawback” provision. If a GP takes carry from an early deal and later deals lose money, the GP may have to return previously paid carry to the LPs.
Note that there are *many* flavors of American waterfalls. For example, some are truly “deal by deal” but most are a bit more complicated – essentially serving as a European waterfall for realized (sold or written down) investments only. Plus, American waterfalls treat fund expenses differently. Some require a return of all fund expenses in step 1, while others only require a return of expenses allocable to the investment at issue.
➡️ European Waterfall Setup
In a European waterfall, everything aggregates at the fund level. So it looks something like this:
The GP cannot earn any carry until the return of capital and preferred return are cleared with respect to all LP capital contributions – not just those for the deal that was sold.
➡️ Which Is “Better”?
It depends on who you ask! GPs generally prefer American waterfalls (faster payouts, more predictable cash flow). LPs almost always prefer European waterfalls (greater protection, cleaner economics). First time fund managers often opt for European waterfalls, but not always! I would say roughly 85% of our clients opt for European waterfalls.
Does your strategy focus on cash flow? Want to hold assets for the long term?
If so, you might want a “split waterfall” that gets you carried interest sooner.
➡️ Why have a split waterfall?
Split waterfalls are helpful if your strategy focuses on cash flow. Most standard waterfalls require a return of capital to LPs as well as a preferred return before the GP can start earning carried interest.
Clearing these hurdles is manageable if the GP plans to sell the assets in a short window.
However, if the plan is to hold the investments for the long term, the “return of capital” step can be problematic. It will take forever for the GP to get carry.
➡️ How does a split waterfall work?
A split waterfall is actually two waterfalls – one for cash flow and one for disposition proceeds. Typically, the two waterfalls look the same, except the cash flow waterfall removes the “return of capital” step.
Here’s an example:
💵 Ongoing cash flow (rents, interest income, operating profits)
💰 Capital events (sales, refinances, recapitalizations)
➡️ Anything to keep in mind when using split waterfalls?
You should *always* have a return of capital step in the disposition waterfall. Full stop.
Refinancing proceeds could theoretically go towards either waterfall, depending on how the LPA is drafted. I take the position that refinance proceeds should run through the disposition waterfall.
This only really makes sense if the fund wants to incentivize the GP to hold onto assets long term but there’s a preferred return to clear. In general, this is suited for private credit and buy-and-hold real estate and private equity. It doesn’t make as much sense for venture capital (which doesn’t have a preferred return) and development (if the plan is to sell the project after it’s built).
Beware of the clawback! It sounds like the villain from a children’s movie.
➡️ What is a clawback?
The carried interest clawback is a contractual obligation requiring the General Partner (or other carry recipients) to return previously distributed carried interest if, at the end of the fund, the GP has received more carry than it is ultimately entitled to.
Think of it as the “true-up” that protects LPs from over-distribution risk.
To be specific, the carried interest clawback essentially re-tests the waterfall as of the date of the final disposition of the fund’s assets. If the GP got more carried interest over the life of the fund if it would have pursuant to this re-test, the excess must be returned to the fund.
➡️ How could the GP get too much carried interest, such that a clawback is possible?
Clawbacks aren’t talking about accounting errors or fraud where GPs send themselves too much carry. Scenarios where a clawback comes into play include the following:
In both situations above, the clawback is the great equalizer at the end of the fund’s life.
➡️ What are variations on clawbacks?
Most clawbacks are tested at the final distribution of the fund’s assets. However, some agreements might have multiple clawbacks staged throughout the fund’s life.
Some fund agreements have escrow provisions requiring a portion of the carry to remain escrowed in the fund until the clawback risk has been reduced.
Many fund agreements reduce the amount of money the GP must return by the amount of actual taxes the GP paid when it received the carry in the first place.
Some fund agreements require the principals of the GP (the actual humans) to personally guarantee the clawback, as opposed to the obligation resting with the GP entity alone.
An LP giveback is an obligation of limited partners (and, to be fair, the GP) to return prior distributions to the fund.
➡️ Why would an LP need to return distributions?
The LP giveback comes into play when the fund needs to pay something…but the fund doesn’t have sufficient reserves, and each LP is fully funded (their uncalled commitment is $0).
These payments might include the following:
➡️ What are the limits on LP giveback obligations?
Most LP giveback provisions are limited. Market-standard protections include:
✔️ Cap by commitment (often 20–30% of total commitment)
✔️ Cap by distributions received (i.e., you can’t be forced to return more than you’ve actually received)
✔️ Sunset period (commonly 2–3 years after distribution or 2-3 years after the fund’s term ends)
In some cases, these limits are waived for funds investing in other funds, if the liability arises from the underlying fund investment’s own LP giveback requirement.
Here’s what an actual provision might look like:
💬 Each Limited Partner shall, upon written notice from the General Partner, return to the Fund such portion of any distributions previously received by such Limited Partner as is reasonably necessary to satisfy the Fund’s indemnification obligations or other liabilities. Notwithstanding the foregoing, the aggregate amount that any Limited Partner may be required to return pursuant to this provision shall not exceed the lesser of (i) twenty-five percent (25%) of such Limited Partner’s Commitment and (ii) the aggregate amount of distributions previously received by such Limited Partner from the Fund. No Limited Partner shall be obligated to return any distribution made to such Limited Partner after the third (3rd) anniversary of the date on which such distribution was made.
The management fee is a recurring fee paid to the manager of an investment fund or syndication.
It sounds simple, but there are many ways to calculate (and reduce) the management fee. GPs and LPs alike should understand how management fees actually work.
➡️ What are management fees?
The management fee is a recurring fee (usually paid quarterly, but sometimes monthly) paid to the manager of an investment fund or syndication. It is typically paid to the Management Company entity (not the GP entity that receives the carried interest).
The management fee is intended to cover Management Company overhead, such as salaries, rent, compliance costs, and sponsor-level accounting.
➡️ How are management fees calculated?
Management fees are always an equation:
BASE × PERCENTAGE
💲 Percentage: Typically between 1.0%–2.5%, with the majority falling between 1.5%–2.0%.
💲 Base: Typically committed capital, invested capital, NAV, or gross income.
Too many investors focus on the percentage without fully appreciating the base…but the base can make a huge difference!
➡️ What’s a “normal” management fee?
“Normal” depends entirely on asset class.
Venture funds: often (i) 2% of commitments during the investment period, and (ii) 1.5% of commitments thereafter.
Private equity or real estate: often (i) 2% of commitments during the investment period, and (ii) 2% of invested capital thereafter.
Hedge funds: often 1.5-2% of NAV.
➡️ Step-downs are common
After the investment period ends, many funds reduce the management fee. In venture funds, the percentage usually steps down. In other closed-end funds, the percentage usually stays the same but the base downshifts from committed capital to invested capital.
The rationale is that the fund manager does more work during the investment period, when they are diligencing and making new investments.
➡️ Management fee reductions
Various items may reduce the management fee, including placement fees paid by the fund, excess organizational expenses (over a negotiated cap), or offsets for other fees earned by the sponsor.
In addition, GPs may elect to waive a portion of the management fee in exchange for a profits interest in the fund. This is essentially a mechanism for funding a portion of the GP commitment to the fund or syndication.
➡️ Fee discounts
LPs may be able to negotiate management fee discounts via side letter. GPs: only do this for large or strategic LPs.
GPs may also proactively offer fee discounts to investors who commit larger amounts of capital or who invest before a specified deadline.
In addition to management fees and carried interest, many funds pay other fees to the GP or its affiliated entities.
These fees are common in many asset classes, but they are also one of the most scrutinized (and negotiated) areas of fund economics. LPs should understand them clearly, and GPs should disclose them carefully.
➡️ What are “affiliated fees”?
“Affiliated fees” are fees paid by the fund or its portfolio investments to the GP, the Management Company, or entities controlled by the GP principals.
These fees typically compensate the sponsor for transaction-level work, operational involvement, or risk assumed in connection with specific investments.
➡️ Common examples of affiliated fees
Depending on asset class, these fees may include:
Not every fund charges these fees, and some asset classes (e.g., venture funds) typically don’t have these fees at all.
➡️ Why do these fees exist?
Affiliated fees compensate the sponsor for real work or real risk that falls outside the scope of general fund management, such as sourcing deals, overseeing construction, operating assets, or personally guaranteeing debt.
These fees function as an additional revenue stream for the sponsor, which is why they receive close scrutiny. If you’re an LP, carefully review *every* way the GP makes money. Usually, the GP is entitled to these fees regardless of the profitability of the fund or syndication.
➡️ Fee offsets are common
Many LPs negotiate management fee offsets, meaning some or all affiliated fees reduce the management fee dollar-for-dollar. For example, board fees, monitoring fees, and transaction fees paid by portfolio companies to the GP or its affiliates often reduce the management fee.
These offsets help prevent “double dipping” by the GP. However, fees charged directly to the fund (like acquisition fees) typically do not reduce the management fee.
➡️ Disclosure is critical
Regardless of whether LPs like these fees, they must be clearly disclosed in the fund’s documents and marketing materials. Any new affiliate fees should be approved by the LPs as a whole group or the LP advisory committee.
Undisclosed affiliated fees are a major red flag and can create serious legal, regulatory, and reputational risk for sponsors.
One of the most common (and most misunderstood) areas of fund economics: *Who pays for what?*
Every fund incurs costs. The key question is whether those costs are properly borne by the fund (and indirectly the LPs) or by the GP or management company itself.
➡️ What are “fund expenses”?
Fund expenses are costs incurred in operating the fund and making investments, and are typically paid directly by the fund.
Common fund expenses include:
These expenses are usually outlined in detail in the LPA and PPM and are shared by the fund’s investors (LPs and the GP to the extent of its capital investment) pro rata.
➡️ 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:
If the expense exists even without the fund, it’s usually a GP expense.
➡️ Why this line gets blurry
In practice, the line between fund and GP expenses can blur.
Examples of expenses that might be fund expenses or GP expenses include:
➡️ Caps, reimbursements, and approvals
LPs often negotiate:
These guardrails protect against shifting GP business overhead onto LPs.
➡️ Disclosure, Disclosure, Disclosure
There is no single “right” allocation, but surprises (or lies) are never acceptable.
LPs and regulators will be very displeased if you don’t follow the rules you set for yourself in the fund documents.
GPs: Be explicit (and honest).
LPs: Read the expense section line by line.
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:
If one LP doesn’t fund, the fund still has obligations. The shortfall can be critical.
➡️ Why it matters
Private funds are built on contractual commitments, not deposited cash.
A single default can:
➡️ Common remedies
Well-drafted LPAs typically include:
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.
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:
➡️ What the LPAC is not
The LPAC does not:
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:
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.
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.
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:
➡️ Points to Negotiate
Common negotiated provisions include:
What happens if the GP wants to purchase a great investment before the fund holds its initial closing?
Warehoused investments are the answer.
➡️ What is a warehoused investment?
A warehoused investment is a deal acquired by the GP (or an affiliate) before the fund’s closing, with the expectation that the fund will later purchase it.
It’s essentially a placeholder structure.
The GP “holds” the asset temporarily until the fund is ready.
➡️ Why warehouse deals?
Common reasons include:
In emerging manager funds, warehousing is especially common.
➡️ How does it work?
Typically, the steps are as follows:
Another method involves forming the fund entity and having the GP affiliate loan money to the fund entity before the initial closing. Then, at the initial closing, the fund calls capital to repay the affiliate loan.
➡️ Where risk creeps in
Warehousing raises conflict issues:
Many LPAs require:
➡️ Regulatory and tax issues
Warehoused investments typically are not eligible for QSBS treatment upon their transfer to the fund.
In addition, unless the warehoused investment is purchased (and transferred by) the fund’s management company (or a wholly-owned subsidiary thereof), it’s possible the transferred investment would not be a “qualifying investment” for the purposes of the “venture capital exemption” under the Investment Advisers Act.
Co-investments allow investors to participate directly in a portfolio company alongside the fund, rather than only through their interest in the fund itself.
Instead of all capital flowing through the main fund vehicle, the GP may open up additional capacity in a deal for select investors to invest at the deal level — often through an SPV and typically on the same (or better) economic terms as the fund.
➡️ What are pro rata co-investment rights?
Pro rata co-investment rights give an LP a contractual right to participate in co-invest opportunities in proportion to its ownership percentage in the fund.
Example: If an LP owns 10% of the fund, it may have the right to take 10% of any co-investment allocation made available.
These rights are most commonly negotiated by anchor or large institutional investors.
➡️ Why do LPs push for this?
➡️ Where complexity creeps in
Even “pro rata” rights raise practical questions:
Better economics can also create tension. If co-investments are offered at reduced or zero fees and carry, the GP must be careful not to shift value away from the main fund or create resentment.
Co-investment rights may be present in the LPA (visible to everyone) or granted to a select few LPs via side letter.
Pro rata co-investment rights can be powerful relationship tools — and meaningful economic enhancements for large LPs.
Every private fund has potential conflicts.
Because the GP, management company, and their affiliates often sponsor multiple vehicles, invest personally, or provide services to the fund, situations can arise where their interests are not perfectly aligned with those of the LPs.
➡️ Where do conflicts typically arise?
Common examples include:
These are normal in private fund structures, but they must be disclosed and properly governed.
➡️ How are conflicts addressed?
Most fund agreements include guardrails such as:
The LPAC plays a central role in reviewing and approving material conflicts.
➡️ Why this matters
If conflicts are poorly documented or handled informally, you create litigation risk, regulatory exposure, and strained LP relationships.
In addition, if the fund’s management company is a Registered Investment Adviser, LP (or LPAC) approval of certain affiliated transactions is required by law.