Fund LPA: Clawback, LPAC and GP Removal

Discussions at the first meeting cover fund economics: management fee, hurdle, carry and catch-up. These terms describe the fund's expected operation. Protective LPA provisions address a different scenario: the fund falls short of its plan, a key partner has left and portfolio valuations appear unduly optimistic. Those provisions determine the actions available to an investor in year seven.

An LP in a closed-end fund has no exit. An LP cannot redeem a commitment, sell its interest without the GP's consent or remove the manager unilaterally. The LP has contractual mechanisms fixed before first closing; the document changes little thereafter because amendments require a supermajority. The architecture of a fund, the waterfall and the standard economic terms are covered separately in the private funds guide.

Clawback: giving back carry already paid

Clawback results from the calculation of a deal-by-deal waterfall. The GP receives carry from each successful exit; if the later deals underperform, the fund closes with LPs short of both capital and hurdle while carry has long since been distributed among team members. The base calculation happens once, at liquidation — when the funds have already been spent and some of the carry recipients no longer work at the firm. LPs therefore negotiate three points.

Interim clawback runs the same calculation at an earlier date on a hypothetical liquidation: the remaining portfolio is treated as sold at fair value and the waterfall is recomputed. The usual test dates are the end of the investment period and the end of the fund's stated term. A 2024 Paul Weiss survey put the feature in 64% of funds, an increase attributed directly to the shift in bargaining power toward LPs. It stays rare in European (whole-of-fund) waterfalls, where the GP reaches the carry tier late in the fund's life.

Escrow. ILPA recommends holding back at least 30% of distributed carry until final reconciliation. Market levels are lower — practitioners cite 15–20% — and escrow itself is materially less common than the clawback obligation it secures. The GP's resistance reflects the absence of earnings on retained funds while the portfolio compounds.

Partner guarantees. ILPA argues for joint and several liability across individual GP members, so each is liable for the whole amount. The market has settled on several liability: each partner is liable only for their proportionate share of the amounts they personally received. It is documented in a standalone guarantee with LPs as express third-party beneficiaries, and the guarantee is most relevant in the middle market — for large managers, the firm's own creditworthiness is treated as sufficient. Upwelling Capital Group estimates roughly one in fourteen US private equity firms is currently exposed to a clawback.

The diagram below shows the four money flows the LPA's protective mechanisms are built around.

Gross or net of tax

The main contractual dispute concerns one formulation. A GP partner received carry, paid income tax on it, and kept a notional 65%. If the clawback is computed gross of tax, the full 100% must be returned — while the tax authority refunds neither fully, nor promptly, nor under the same year's rules.

ILPA maintains the position that clawbacks should be gross of taxes paid; where the parties agree on net, the hypothetical marginal rates should reflect the affected partners' actual rates, with loss carryforwards and carrybacks taken into account. Market practice differs: virtually every clawback is capped at carry received less taxes. This operates as a ceiling, not an automatic deduction — with carry of 100 and a 30% rate the obligation caps at 70, but if the computed excess is 50, all 50 must be returned. Assessment covers whether the tax adjustment is a cap or a deduction, whose rate is used, whether loss carryovers count, and where the carry recipients are tax resident (carried interest 2026).

Recycling: reinvesting instead of distributing

Recycling is the fund's right to reinvest exit proceeds instead of distributing them. Formally the LP loses nothing — the same capital is invested twice. In practice DPI declines, no cash is received, tax on the exit gain accrues whether or not it is distributed (phantom income), and liquidity planning for future capital calls is disrupted. Typically recyclable amounts include: return of cost basis, amounts applied to management fee and fund expenses, unused deal deposits and bridge financing. Profit above cost basis is more often excluded.

Recycling is constrained by a cap and a time period. Goodwin's terms database shows 37% of funds with no cap at all; among the rest, the most common formulation permits investing up to 120% of aggregate commitments (30% of all funds). Rates vary considerably by asset class: 78% of debt funds have no cap, real estate 60%, venture only 15%. The period may be short — proceeds received within 12 to 18 months of the investment — or long, covering the whole investment period and occasionally beyond. ILPA asks for either an agreed cap or at least a monitoring threshold so LPs can forecast cash needs, and insists the right expire with the investment period. The trend favours GPs: 48% of funds launched in the last four years carry no restrictions beyond the overall cap, seven percentage points above the full database.

The LPAC: remit and limits of authority

The LP Advisory Committee is a body of large-LP representatives appointed by the GP: typically three to nine members, one vote per institution, no de facto veto for any single holder. Its remit is conflicts and valuation — related-party transactions, deals involving portfolio companies of affiliated funds, affiliate loans to the fund, service contracts with GP-owned providers. A second category covers departures from the LPA itself: term extensions, key person replacements, follow-ons after the investment period, waivers of investment restrictions (concentration limits, public securities, foreign jurisdictions) and changes of control at the GP. Valuation methodology is also within its remit.

At the same time, the LPAC is not a governing body: it makes no investment decisions, does not substitute for a vote of all partners where one is required, and does not supervise the manager in any corporate sense. The Delaware Revised Uniform Limited Partnership Act places advisory committee service inside the § 17-303 safe harbour, so serving does not by itself put an LP into control — but the wider the remit, the closer it comes to the boundary between advisory service and control.

Fiduciary status is settled by drafting. ILPA's formulation is that LPAC members are generally understood not to owe fiduciary duties to the fund beyond a duty to act in good faith. The qualification "understood" is significant: absent an express carve-out, case law tends to support the conclusion that committee members become fiduciaries to the other LPs. The contractual protections to review therefore include duties expressly limited to good faith, exculpation, indemnification from the fund, D&O cover extended to committee members, minutes, and in camera sessions without the GP present. In 2024 the SEC added adherence to contractual LPAC requirements to its examination priorities.

GP removal, no-⁠fault divorce and key person events

For-cause removal. The standard "cause" list includes fraud, gross negligence, wilful misconduct, material breach of the LPA or of fiduciary duties, bad faith and illegal activity. ILPA treats a simple majority in interest as sufficient both to suspend the investment period and to remove the GP. Market practice imposes stricter conditions: "cause" is frequently tied to a final, non-appealable judgment, whereas ILPA recommends allowing removal upon a preliminary determination of the bad act.

No-fault divorce. The right to end the investment period or remove the GP without proving wrongdoing. ILPA treats a two-thirds supermajority as the norm; the market usually demands 75% or more, which, given LPs' limited knowledge of each other, constitutes a second constraint. Preqin data shows no-fault removal in 77% of 2011-vintage funds and 58% of 2019–2020 funds. The provision then all but vanished, returning in 2023–2024 as fundraising conditions deteriorated — and first-quartile managers now agree to it, which was previously nearly impossible. Consequences depend on fault: for-cause removal typically forfeits carry entirely and stops the management fee, while no-fault preserves accrued carry, though ILPA argues for a meaningful reduction so a replacement manager has an incentive to complete the remaining portfolio work.

Key person event. Key persons should be the individuals who actually determine the fund's outcome rather than whoever holds the founder title, and ILPA expects them to devote substantially all their business time to the fund. A trigger should suspend the investment period automatically, with the suspension turning permanent after 180 days unless a supermajority of LPs votes to reinstate. The 2025–2026 market is moving away from binary triggers toward tiered triggers and substitution mechanisms, while the list of triggering events widens from death and departure to ethical and legal misconduct.

Individual LP rights

MFN lets an LP claim terms granted in other side letters, tiered by commitment size; the disclosure mechanics and the usual carve-outs are covered in side letter. Excuse and exclude rights allow an LP to decline participation in a specific deal on regulatory grounds, sanctions exposure or investment policy. ILPA asks GPs to accommodate an investor's exclusions policy, with one caveat: the resulting concentration is borne by all other investors.

Giveback (LP clawback) is an obligation to return distributions already received when the fund faces indemnity obligations. The market has converged on 25% of commitments as the standard cap: 61% of funds use that figure in a "lower of" construction, and the most common formula reads "the lower of 25% of commitments and 100% of distributions." The period is two to three years, and the starting point is material — the period runs either from each distribution or from fund termination.

Transfer restrictions. Selling an interest requires GP consent, and a "not to be unreasonably withheld" standard is far from universal; discretion is often absolute. The definition of "transfer" in modern LPAs covers economic transfers, derivative exposure, pledges and synthetic structures. A ROFR, publicly traded partnership constraints and AML checks extend a secondary sale of an LP interest over months.

ILPA as the industry benchmark

ILPA — the Institutional Limited Partners Association — is not a regulator, and its publications are not law. They are the negotiating position of institutional LPs written down as a standard, and citing them in negotiation is effective.

Principles 3.0 (June 2019) are based on three principles: alignment of interest, governance and transparency. A Model LPA followed in October 2019, later joined by a deal-by-deal version. Reporting is handled by templates: Reporting Template v2.0 and the new Performance Template were published in January 2025 under the Quarterly Reporting Standards Initiative, which ILPA launched in early 2024 in response to the quarterly-statement requirements of the SEC's Private Fund Adviser Rules and continued after the US Court of Appeals for the Fifth Circuit vacated those rules on 5 June 2024; they replace the 2016 template for funds still in their investment period during the first quarter of 2026 or commencing operations on or after 1 January 2026. On subscription lines the position is specific: no more than 180 days outstanding, a limit of roughly 20% of commitments, and preferred return accruing from the date capital goes at risk — the drawdown under the facility, not the eventual capital call. The continuation fund guidance (2019, updated in May 2023; in 2026 ILPA issued a disclosure template for these transactions and put a revised version of the guidance out for comment) calls for the LPAC to vote on conflict waivers rather than rely on an anticipatory waiver in the LPA, for third-party price validation, for a status quo option for existing LPs with no crystallisation of carry, and for at least 30 calendar days or 20 business days to decide.

Review of LPA terms

The assessment begins with clawback and recycling, proceeds to the LPAC's remit and then the two governance provisions — the definition of cause with its vote threshold and no-fault with its own — followed by key person, and finally giveback, transfer restrictions and excuse rights. The LPA should be assessed before signing the subscription agreement, while terms can still be negotiated, with the jurisdiction taken into account: a Delaware LP permits even a waiver of fiduciary duties. The LP has only the rights written into the agreement.