Fund economics get discussed at the first meeting: management fee, hurdle, carry, catch-up. All of it describes the scenario where the fund works as intended. The protective sections of an LPA describe the other one — the fund is behind plan, a key partner has walked, and the portfolio marks look suspiciously cheerful. That part of the agreement decides what an investor can actually do in year seven, and it is the part everyone reads last.
An LP in a closed-end fund has no exit. You cannot redeem a commitment, you cannot sell your interest without the GP's consent, and you certainly cannot fire the manager by letter. What you have instead is a set of contractual levers fixed before first closing; after that the document barely moves, since amendments need a supermajority. What follows is how those levers work. 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 comes out of the arithmetic of a deal-by-deal waterfall. The GP takes carry off each successful exit; if the later deals disappoint, the fund closes with LPs short of both capital and hurdle while the carry has long since been split inside the team. The base calculation happens once, at liquidation — by which point the money is spent and some of the carry recipients no longer work at the firm. Hence three points LPs push on.
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, a jump 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 life anyway.
Escrow. ILPA recommends holding back at least 30% of distributed carry until final reconciliation. The market sits lower — practitioners cite 15–20% — and escrow itself is materially less common than the clawback obligation it secures. The GP's resistance is easy to understand: the money earns nothing while the portfolio compounds.
Partner guarantees. ILPA argues for joint and several liability across individual GP members, so each stands behind the whole amount. The market has settled on several liability: each partner is on the hook only for their proportionate share of what they personally received. It is documented in a standalone guarantee with LPs as express third-party beneficiaries, and it matters most 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.
Gross or net of tax
The real fight is over a single 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% goes back — while the tax authority refunds neither fully, nor promptly, nor under the same year's rules.
ILPA holds the line 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. The market went the other way: virtually every clawback is capped at carry received less taxes. The subtlety is that 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 goes back. What to check: 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: when returned capital does not come back
Recycling is the fund's right to reinvest exit proceeds instead of distributing them. Formally the LP loses nothing — the same capital works twice. In practice DPI falls, no cash arrives, tax on the exit gain accrues whether or not it is distributed (classic phantom income), and liquidity planning for future capital calls goes sideways. What is typically recyclable: 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 carved out.
Recycling is constrained by a cap and a window. 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). By asset class the spread is wide: 78% of debt funds have no cap, real estate 60%, venture only 15%. The window may be narrow — proceeds received within 12 to 18 months of the investment — or broad, 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: what it decides and what it is not
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 real 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 cluster 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 sits alongside.
What the LPAC is not matters more. It 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 grows, the closer that line comes.
Fiduciary status is settled by drafting, not by default. 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 weak point is "understood": absent an express carve-out, case law tends to support the conclusion that committee members become fiduciaries to the other LPs. Hence the protections worth hunting for in the text — 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 runs to 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. Practice sets the bar higher: "cause" is frequently tied to a final, non-appealable judgment — a threshold ILPA itself calls unattainable.
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 how little LPs know about each other, functions as a second barrier. 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 concede it, which was close to impossible before. Consequences track 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 a reason to finish the portfolio.
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.
What an individual LP can hold
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 sit out 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 lands on everyone else.
Giveback (LP clawback) is the mirror image — 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 window is two to three years, and the starting point matters — the clock 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 reaches economic transfers, derivative exposure, pledges and synthetic structures. Add a ROFR, publicly traded partnership constraints and AML checks, and it becomes clear why a secondary sale of an LP interest takes months.
Mechanism
What it protects against
What to check in the text
Clawback + escrow
overpaid carry when the fund finishes weak
interim test; share of carry escrowed; gross or net of tax; several or joint guarantees
Recycling
liquidity and a predictable DPI
cap as % of commitments; window; which proceeds qualify
LPAC
unchecked conflicts and valuation methodology
list of reserved matters; standard of member duties; minutes and in camera sessions
For-cause removal
manager misconduct
definition of cause; is a judgment required; vote threshold; fate of carry
No-fault divorce
an honest but underperforming manager
present at all; two-thirds or 75%+; what terminates
Key person event
loss of the team the fund was raised on
named individuals; automatic or by vote; reinstatement period
Giveback
open-ended recall of distributions
cap and base; two-to-three-year window; when the clock starts
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 works.
Principles 3.0 (June 2019) rest on three pillars: 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, formed in 2024 after the courts vacated the SEC's Private Fund Adviser Rules, and they replace the 2016 template for funds commencing 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 15 May 2023) 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 days to decide.
What to read first in someone else's LPA
The reading order does not follow the table of contents. Start with clawback and recycling, move to the LPAC's remit, then to the two power provisions — the definition of cause with its vote threshold and no-fault with its own — then key person, and only then to giveback, transfer restrictions and excuse rights. The specific questions for each are in the table above. Do this before signing the subscription agreement, while there is still a negotiating window, and adjust for jurisdiction: a Delaware LP permits even a waiver of fiduciary duties. One rule holds throughout: what is not in the agreement, the LP does not have.