Your fund's core documents define every aspect of the GP-LP relationship: economics, governance, investor rights, and exit. Getting these wrong does not just create legal risk. It creates operational problems that compound over the life of the fund. A poorly drafted management fee provision means quarterly disputes with your administrator. An inconsistent hurdle rate definition between documents means distribution delays. These four documents are the foundation your fund runs on for 10 or more years.
Limited Partnership Agreement (LPA)
The Limited Partnership Agreement is the governing document of the fund. It is the contract between the general partner and the limited partners that defines how the fund operates, how money flows, and what happens when things go wrong. Every operational decision you make as GP, from calling capital to making distributions to extending the fund's term, traces back to a provision in the LPA.
Key Terms You Must Understand
Management fee. Typically 1.5% to 2.0% of committed capital during the investment period, then 1.0% to 1.5% of invested capital (or net invested capital) after the investment period ends. The LPA must specify the calculation base, the rate, the payment frequency (quarterly in advance or arrears), and whether the fee reduces for subsequent closings. Ambiguity here causes recurring disputes.
Carried interest. The GP's share of fund profits, typically 20%, paid after investors receive their capital back plus a preferred return. The LPA defines whether carry is calculated on a deal-by-deal basis or on a whole-fund (European waterfall) basis. This single distinction can mean a difference of millions of dollars in GP compensation timing.
Hurdle rate. The minimum return investors must receive before the GP earns carried interest, typically 8% per year. The LPA must specify whether the hurdle is compounded or simple, and whether it includes a GP catch-up provision (allowing the GP to receive a disproportionate share of profits until it "catches up" to its 20% carry percentage).
Clawback. If the GP receives carried interest on early profitable deals but the fund overall underperforms, the clawback provision requires the GP to return excess carry. Institutional LPs will insist on this provision. The LPA should specify the timing (interim clawback during fund life vs. end-of-fund only) and whether a clawback escrow is required.
Key person provision. If designated key persons (usually the founding partners) leave or reduce their time commitment below a threshold, the fund's investment period is suspended until LPs vote to continue. This protects LPs from having their capital managed by people they did not underwrite.
No-fault divorce. Allows a supermajority of LPs (typically 75% to 80% by commitment) to remove the GP without cause. The removed GP typically retains its carry on existing investments but loses management fee income. This provision is standard for institutional funds and non-negotiable for most pension fund investors.
Private Placement Memorandum (PPM)
The Private Placement Memorandum is the fund's disclosure document. It describes the fund's investment strategy, risk factors, conflicts of interest, and the terms of the offering. The PPM is what prospective investors receive and review during due diligence. It is not a contract (the LPA is the contract), but it creates disclosure obligations that can form the basis of securities fraud claims if the information is materially misleading or incomplete.
A typical PPM runs 60 to 120 pages and covers the fund's strategy, the GP's track record and team biographies, risk factors, conflicts of interest, fee and expense disclosures, and tax considerations for various investor types (taxable, tax-exempt, foreign).
You are not legally required to have a PPM for a Regulation D private offering. Many smaller funds skip it to save $30,000 to $75,000 in legal fees. But without a PPM, you have weaker protection against claims that you failed to disclose material information. The cost of defending a single disclosure claim far exceeds the cost of the document.
Subscription Agreement
The subscription agreement is the document each investor signs to commit capital to the fund. It serves two purposes: it records the investor's capital commitment amount, and it collects representations and warranties that the GP needs for regulatory compliance.
Investor Representations
Every subscription agreement requires the investor to represent their eligibility status. For a 3(c)(1) fund (limited to 100 investors), each investor must certify that they are an accredited investor under Regulation D: $200,000 in individual income ($300,000 joint) for the past two years, or $1 million in net worth excluding primary residence. For a 3(c)(7) fund (limited to 2,000 investors but with fewer regulatory restrictions), each investor must certify as a qualified purchaser: $5 million or more in investments for individuals, or $25 million for entities.
The subscription agreement also includes ERISA representations, FATCA and CRS tax reporting information, AML/KYC identity verification, and references to any side letter agreements. If your fund accepts investors at multiple closings, each new subscription agreement should reference the then-current LPA and PPM. A subscription agreement that references an outdated PPM creates a disclosure gap.
Investment Management Agreement (IMA)
The Investment Management Agreement is the contract between the fund and the management company. It defines the scope of services the management company provides, the fee it receives, and the conditions under which the agreement can be terminated.
The IMA typically covers the management fee calculation and payment terms (which must mirror the LPA), the specific services provided, expense allocation between the fund and the management company, the term and renewal provisions, and termination triggers. If the LPA says the management fee is 2.0% of committed capital, the IMA must use identical terms. Any inconsistency surfaces during audit and can delay distributions.
Why the IMA matters for multi-fund managers
When you launch Fund II, the management company enters into a separate IMA with Fund II. Each IMA governs the relationship with its respective fund. The management company's operating agreement then governs how the combined management fee revenue is allocated among the principals. This three-layer structure (Fund I IMA, Fund II IMA, management company operating agreement) is the standard architecture for a multi-fund platform.
How These Documents Work Together
The four documents form a stack. The LPA sits at the top as the governing document. The PPM discloses the terms described in the LPA. The subscription agreement binds each investor to the LPA's terms and collects eligibility representations. The IMA connects the fund to the management company that services it.
In the event of a conflict between documents, the LPA controls. If the PPM describes the hurdle rate as 8% compounded annually but the LPA says 8% simple, the LPA governs. However, the discrepancy itself is a problem: an investor who relied on the PPM description may have a claim based on the disclosure, even though the LPA controls the economic terms.
Amendments to the LPA typically require LP consent (majority or supermajority by commitment). The PPM can be updated by the GP without LP approval, but material changes should be disclosed to existing investors. The IMA can be amended by the GP and management company, but fee changes must be consistent with the LPA and disclosed to LPs.
Common Mistakes
Inconsistencies between the LPA and PPM. This is the most common and most dangerous document error. Your lawyer drafts the LPA. A different team at the same firm, or a different firm entirely, drafts the PPM. The management fee calculation in the LPA uses "net invested capital" but the PPM says "invested capital." That one word creates a dispute the first time you calculate fees after a realization. Every defined term in the PPM must exactly match the LPA.
Missing the IMA entirely. First-time managers skip the IMA because the GP and management company have the same principals. Without the IMA, the management fee has no contractual basis separate from the LPA. If the GP is removed and replaced, there is no document governing the transition of management services.
Not updating documents for subsequent closings. If your fund has multiple closings over six to twelve months, the PPM should be updated to reflect material changes (new investments, updated performance, team changes, new risk factors). Investors in a later closing who receive the original PPM may not have current information, which undermines your disclosure protection.
Side letter conflicts. Side letters modify individual investor terms (fee discounts, co-investment rights, reporting). If a side letter grants a reduced management fee but the LPA does not authorize side letters, enforcement becomes murky. The LPA should include a side letter provision, and each side letter should specify which LPA provisions it modifies.
This guide is for informational purposes only and does not constitute legal, tax, or investment advice. Fund document terms vary based on fund strategy, investor base, and regulatory requirements. Consult qualified legal counsel before finalizing any fund documents. Capital Company provides fund administration services and does not provide legal or tax advice.