Introduction
A limited partnership agreement is negotiated once, around a fund's first close, and then governs transactions its drafters may never have pictured. The Institutional Limited Partners Association (ILPA) makes the point in its 2024 guidance on NAV facilities: funds that use such facilities tend to be older and are governed by LPAs drafted without any express reference to them. Continuation vehicles, tender offers, and LP portfolio sales run into the same gap, so the first thing a private capital advisory banker reads on a new mandate is usually the fund agreement and its side letters, not a model.
Most early questions on a mandate are answered, or left open, by that text: can this LP sell, whose consent does a continuation vehicle need, may the fund borrow against its portfolio, how long does the manager have left. Reading it well means knowing which clauses gate which transaction, and keeping three layers apart: what the contract says, what the law requires, and what ILPA recommends.
Contract, Law, and Best Practice: Three Layers of Fund Rules
The LPA is a contract between the general partner and every limited partner, signed alongside a subscription agreement and, for many investors, a side letter; the basic cast is laid out in this overview of private equity fund structure. Partnership statutes supply the legal frame, and Delaware, the basis of the ILPA model and of many US funds, is explicit about its priority: its limited partnership act aims to give "maximum effect to the principle of freedom of contract" and lets the agreement restrict or even eliminate partners' fiduciary duties, preserving only the implied covenant of good faith and fair dealing. English and Luxembourg partnerships likewise leave most of the bargain to the agreement, but law still shapes the drafting: the UK's 2017 private fund limited partnership regime lists actions, such as voting on a term extension, that a limited partner can take without losing limited liability, one reason LP rights are written as consents and votes rather than management powers.
- Limited Partnership Agreement (LPA)
The contract that forms a private fund structured as a limited partnership and governs the relationship between the general partner and the limited partners. It sets the fund's term and investment period, capital call and distribution rules, fees and carried interest, governance rights such as GP removal and advisory committee consents, and the conditions for transferring an interest.
The advisor's working question is which layer a rule comes from, because each binds differently:
- Contract: the LPA, subscription agreement, and side letters, binding on the GP and LPs and changeable only through the procedures they set.
- Law: the partnership statute, securities, tax, and ERISA rules, and the Investment Advisers Act for registered managers, which apply whatever the documents say and often explain why a clause exists.
- Best practice: ILPA's Principles 3.0 of 2019 and its Model LPA, a whole-of-fund version from 2019 (updated July 2020) later joined by a deal-by-deal version. LPs use them as a benchmark, but a fund is bound only by what its own documents adopt.
Regulation of the manager sits beside the contract rather than inside it. The SEC's 2023 private fund adviser rules would have limited certain preferential treatment of investors and required a fairness or valuation opinion on adviser-led secondaries, but the Fifth Circuit vacated the rules in their entirety on June 5, 2024, leaving the fund documents, fiduciary duty, and antifraud rules to carry the weight, as the article on the vacated SEC rules explains.
The Clauses That Gate an LP-Led Sale
In an LP portfolio sale the selling LP is the client, yet each underlying fund's GP controls what bidders see, whether the transfer is approved, and how the buyer is admitted. The buyer, in turn, steps into obligations the headline price does not show.
Transfer Restrictions: GP Consent, ROFR, and Transferee Qualification
The ILPA Model LPA starts from a flat prohibition: no partner may transfer its interest except as the transfer article allows, and any other transfer is void. A permitted transfer needs the GP's prior written consent, which the model says may not be unreasonably withheld once the buyer meets its conditions. Many market LPAs give the GP wider discretion, so the actual standard is among the first things an advisor records for each fund. The conditions show where law sits behind the contract:
- Investor status: the buyer must be an accredited investor and, in bracketed text, a qualified purchaser, protecting the fund's Investment Company Act exemption.
- Plan assets: the transfer must not make the fund's assets plan assets under ERISA.
- Tax status: the transfer must not threaten the fund's partnership tax treatment under the publicly traded partnership rules.
- Costs: the seller or buyer pays the transfer expenses, whether or not the sale completes.
Some LPAs also give the GP, or a party it designates, a right of first refusal over any interest an LP agrees to sell, which the advisor has to plan for before launch.
- Right of First Refusal (ROFR)
A contractual right that lets a named party, in a fund usually the general partner or its designee, buy an interest on the same terms a seller has agreed with a third-party buyer. The seller must present the negotiated deal to the holder, who can match it or let the transfer proceed.
A ROFR changes the auction more than the price: a buyer that spends weeks on diligence can lose the fund to a match, so some bid less aggressively on those interests or ask the advisor to seek a waiver before bids are due. The consent paperwork and closing sequence are set out in the article on transfer mechanics and GP consent.
Confidentiality: What the Seller May Show a Buyer
Under the model's confidentiality clause, an LP may not disclose proprietary information about the fund or its portfolio companies without the GP's prior written consent, subject to exceptions for regulators, legal requirements, other LPs, and its own advisers. A separate list of authorized disclosures covers the LP's own position: the fund's name, its commitment, unfunded commitment and contributions, distributions, fees and carry paid, and the fair market value of its interest.
That split shapes the data room. Summary figures from the seller's statements can go to bidders, but portfolio company detail usually needs the GP's agreement, one reason underlying GPs set the pace of a sale they are not party to, as the PCA ecosystem article explains. Public pension sellers add a layer, because public records laws can compel disclosures a standard confidentiality clause does not allow; the model expects individual side letter language for them.
What the Buyer Inherits: Unfunded Commitments, Recycling, and Defaults
Once admitted, the buyer becomes a substitute partner that succeeds to all of the seller's rights and obligations for that interest. The largest obligation is the unfunded commitment, but three provisions can make the real exposure larger than the figure on the capital account statement:
- Recycling: the model lets the fund recall distributions equal to capital used for investments realized within 12 months and for fees and expenses, noting that some investors insist on a cap such as 110% of commitments.
- Default remedies: an LP that misses a call can lose distributions, be forced to sell at 50% of the lower of its contributions or its interest's value, forfeit up to all of its interest, or have its commitment cut, and it loses its vote.
- Management fee basis: the model charges the fee on commitments during the commitment period and on net invested capital afterwards, so the fee drag a buyer takes on depends on the fund's stage.
Default remedies also make LP commitments reliable enough to lend against, which is why the model lets the GP pledge its right to call capital, and to pursue a defaulting LP, to the lender on a subscription line. How calls, distributions, and those facilities interact is covered in the article on capital calls and the LP cash-flow problem.
ILPA's Principles recommend capping recycling and letting unused recallable amounts expire with the investment period, which is worth checking fund by fund. The fee schedule itself is worked through in the article on fees, carry, and the distribution waterfall.
The Clauses That Gate a Continuation Vehicle
In contract terms a continuation vehicle is a sale of fund assets to another vehicle managed by the same GP, so the conflicts clause is its first gate, the term clause usually its motive, and the amendment clause the test of whether anything else needs a vote. The existing distribution waterfall decides what the sale means for carry; ILPA's Principles recommend that carry on assets moved between a GP's funds be rolled in kind, after a competitive valuation and LPAC approval. How carry and the GP commitment are reset is covered in CV economics.
Term, Extensions, and the Investment Period: The Clock Behind the CV
The model sets a ten-year term from the initial closing, with up to two one-year extensions: the first needs advisory committee consent, the second a majority in interest of LPs. ILPA's Principles 3.0 recommend one-year increments capped at two, LPAC approval followed by a supermajority of LPs, liquidation within a year once the term ends without consent, and no management fee after the original term. The model's fee also stops at the end of the initial term, so a GP holding a strong asset late in a fund has a practical reason to look beyond another extension.
The investment period, called the commitment period in the model, is the second clock. It runs five years in the model's bracketed draft, extendable by one year with consent; afterwards the fund may call capital only for expenses, committed deals, and follow-on investments, optionally capped at 18 months after the period ends or 15% of commitments. A company that needs growth capital late in a fund's life can outrun that limit, which is why a continuation vehicle often raises money for follow-ons as well as for selling LPs. The phases are covered in the fund lifecycle article.
Affiliated Transactions and the LPAC
The model forbids the GP from causing the fund to transact with an interested person, even on arm's-length terms, without the advisory committee's prior written consent, and states that disclosing a conflict as a risk factor does not pre-clear it. A continuation vehicle is exactly that kind of transaction. ILPA's Principles also ask LPAs to include anticipatory language on GP-led processes, covering notice periods, conflict approvals, voting, and expenses, so that a later process is not improvised against a silent document.
The committee that consents is small and appointed by the manager: three to seven LP representatives in the model, one vote each, no part in managing the fund. Its members may themselves be bidders or rolling investors, a conflict the advisor has to surface early. The committee's wider remit is covered in the article on LPACs, conflicts, and ILPA principles.
Amendments and LP Consent Thresholds
When a transaction needs something the LPA does not permit, such as a third extension, the amendment clause decides who can say yes. The model requires the GP plus 75% in interest for most amendments, 90% for changes to investment objectives, policy, or fund size, and the consent of each affected LP for any change to its distributions, management fee, or commitment. Votes are counted in interest, by commitment rather than by head, with affiliated and defaulting partners left out.
How non-responses count can matter as much as the threshold. ILPA recommends treating them as abstentions, excluded from numerator and denominator. On an illustrative 75% threshold with LPs holding 20% of commitments silent, that needs yes votes from 60% of total commitments (75% of the 80% responding), while an LPA that counts silence as a no needs the full 75%.
The Clauses That Gate Fund-Level Borrowing and NAV Loans
The model is restrictive: the fund may borrow only for under six months pending capital calls, with total borrowing capped at the lower of 15% of commitments and remaining unfunded commitments, and any loan from the GP's affiliates needs committee consent. Market LPAs vary widely, and many were written with subscription lines in mind rather than loans secured on the portfolio. An advisor on a NAV loan therefore asks whether the borrowing limit reaches the facility, who can waive it, and what the LPA says about use of proceeds.
Structure makes those questions live. NAV facilities are often borrowed by a special purpose vehicle below the fund, and ILPA's guidance records that some GPs have read their LPAs as leaving them outside fund-level leverage limits; ILPA says they should count. It recommends LPAC consent for any facility the LPA does not expressly permit and for any facility funding distributions, which are often recallable and so feed into what a secondary buyer inherits. Lenders, terms, and disclosure are covered in NAV lending in practice.
The Clauses Negotiated at a Fundraise
The terms that gate secondaries are set during a primary fundraise, often years before anyone tests them, and the current fund's terms gate the next raise too. The model bars the manager from earning fees on an overlapping successor fund until the earliest of the end of the commitment period, 80% of commitments invested, committed, or reserved, 60% funded for investments, or termination, unless a majority in interest consents. For a placement agent, launch timing is partly a reading of that clause.
Key Person Provisions, GP Removal, and Change of Control
LPs commit to a team as much as a strategy. The contract protects that bet through a key person clause, which ILPA's Principles say should name the people who actually determine investment outcomes, not only the founders.
- Key Person Provision
A clause in a fund's LPA that names the individuals whose continued involvement LPs rely on and sets out what happens if they leave or stop devoting enough time to the fund. The usual consequence is automatic suspension of the investment period, which becomes permanent unless LPs approve a remediation plan or vote to reinstate it.
Under the model, a key person event suspends the commitment period automatically, no capital may be called for new investments, and the period terminates if a majority in interest has not approved a remediation plan within 90 days. A live event cuts both ways in a secondary: a buyer of the LP interest faces fewer new calls but a team under strain, and a GP-led process has to resolve the remediation question first.
GP removal is the LPs' ultimate remedy. The model allows removal for cause by a majority in interest, in a bracketed option only after a court confirms the misconduct, and removal without cause by 75% in interest, with an optional haircut to carry; ILPA's Principles recommend two-thirds for no-fault removal. Changing manager takes time even once investors agree: after the Abraaj Group collapsed in 2018, its Growth Markets Health Fund passed to AlixPartners as interim manager, and TPG closed its takeover of the fund's assets in June 2019, renaming it the Evercare Health Fund.
| Decision | ILPA Model LPA (whole-of-fund) | ILPA Principles 3.0 |
|---|---|---|
| Most LPA amendments | GP plus 75% in interest | Supermajority in interest |
| Term extensions | First by LPAC, second by majority in interest | LPAC, then supermajority; two at most |
| GP removal without cause | 75% in interest | Two-thirds in interest |
| GP removal for cause | Majority in interest | Simple majority in interest |
| Restarting investment after a key person event | Majority approves a remediation plan | Supermajority to reinstate |
| GP interest transfer or change of control | 85% in interest | Notify LPs of any transfer |
The last row matters on manager-level deals. Because the model requires 85% in interest before the GP transfers any of its interest or undergoes a change of control, a GP stake sale starts with the LPAs of every fund the manager runs, and the rights the buyer receives are drafted against those clauses, as GP stakes explained sets out.
Side Letters and the Most Favored Nation Clause
Side letters accommodate individual investors on regulatory, tax, reporting, or policy needs, and sometimes on fees. The model lets the GP enter them without other LPs' approval but requires notice of all side-letter terms to every LP after the final close, and it gives every investor a most favored nation right.
- Most Favored Nation Clause (MFN)
A provision in an LPA or side letter that entitles a limited partner to elect the benefit of more favorable terms granted to other investors in the same fund. MFN rights come with carve-outs and, in many funds, reach only terms given to investors with the same or smaller commitments.
The model's MFN excludes rights tied to one investor's regulatory, tax, or policy situation, consents to transfers to affiliates, excuse rights, and committee seats. Market practice is usually narrower, with tiers by commitment size and an election window after the final close, so a fundraise ends with an MFN process in which each eligible LP picks what it can claim. Negotiating those terms is covered in the article on fund terms and side letters.
Secondaries test the same architecture from the other side. Side letters are bilateral, so a buyer cannot assume a seller's fee discount, reporting rights, or committee seat will follow the interest; that depends on the side letter's wording and the GP's agreement. With the SEC's preferential treatment rule vacated, what other investors learn about side letters depends largely on the LPA's notice and MFN provisions, alongside general antifraud obligations.
The LPA as a Map of Consents
Sorted by transaction rather than by clause, the provisions above reduce to a short list of gates and the parties who hold the keys:
| Transaction | Clauses that gate it | Who can unlock it |
|---|---|---|
| LP-led sale | Transfer, ROFR, transferee conditions, confidentiality | Underlying GP; any ROFR holder |
| Continuation vehicle | Conflicts, term, investment period, amendments, waterfall | LPAC; LPs by vote; each LP by election |
| NAV loan | Borrowing limits, use of proceeds, recycling | The LPA itself; LPAC waiver or consent |
| Fundraise | Successor fund, key person, side letters and MFN | Existing LPs; incoming LPs in negotiation |
| GP stake sale | GP interest transfer, change of control | LPs by the required percentage in interest |
The map also runs in reverse. Each gap found on a secondary, whether a borrowing clause silent on NAV facilities or a conflicts clause that never anticipated a continuation vehicle, becomes a point LPs raise when the manager next comes to market; ILPA's call for anticipatory GP-led language is that feedback written down. The drafting gap is where the secondaries and primary businesses meet: an advisor who has read the old fund's documents closely can tell a selling LP which clause will set its timetable, and tell a manager which terms the next fund will have to renegotiate.
