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Explanatory Notes Limited Partnership Agreement

LP Agreement

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Explanatory Notes

LimitedPartnershipAgreement

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For many years, private equity and venture capital funds have predominantly been formed as limited partnerships.

The US venture capital industry led the way in using the limited partnership as a fund vehicle and it has, for more

than a decade, been adopted almost universally for UK-based private equity and venture capital funds.

(Alternative fund structures are referred to in the “Structuring venture capital funds” section of the BVCA Notes of

Guidance).

T

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PageLimited Partnership Agreement 3

Basic Structure 4

Clause1. Parties 6

2. Introduction (or Recitals) 6

3. Definitions and Interpretation 6

4. Name and Place of Business 6

5. Establishment 6

6. Purpose of the Partnership 6

7. Duration of Partnership 7

8. Capital and Loan Contributions 7

9. Loan Commitment 8

10. Allocations, Sharing and Distributions of Partnership Profits 8

11. Carried Interest 9

12. Appointment and Removal of the General Partner 10

13. Powers, Rights and Duties of the General Partner 10

14. Powers of Limited Partner 11

15. Withdrawal of Partners 11

16. Borrowing and Bridge Financing 11

17. Establishing a New Fund 11

18. Co-Investment Rights 12

19. Fees and Expenses: Management Fee, Establishment Costs,Transaction Costs, Fee Income 12

20. Transfer of Interests – Limited Partners and General Partner 13

21. Termination of Partnership 14

22. Follow-on Investments 14

23. Accounts and Reports 15

24. Meetings of Investors 15

25. Consents, Meetings and Votes 15

26. Representations and Warranties 16

27. Advisory Board 16

28. Information Memorandum 17

29. Deed of Adherence 17

30. Variation of Agreement 17

31. Indemnification of General Partner 18

32. International Issues 18

33. Miscellaneous Legal Issues 19

34. Legal Opinions 19

35. Documents to be signed by Investors 20

Glossary of Terms 21

Index to Limited Partnership Agreement

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For private equity funds formed as limited partnerships, the key legal document is the limited partnership

agreement (LPA) which sets out in detail the legally binding relations between the investors (as limited partners in

the partnership) and the general partner (representing the fund manager). The partners are free to agree

whatever commercial terms they choose to be in the LPA, save that a limited partner may not take part in the

management of the limited partnership; if it does, it will lose its limited liability status.

The LPA sets out the rights and obligations of the partners and seeks to cover every aspect of the formation,

operation and termination of the partnership, from the key commercial issues (e.g. investment policy, profit

sharing, fees and expenses, etc.) to the detailed constitutional and administrative issues (e.g. when the manager

can launch a new fund, reports and accounts, provision of information, etc).

Limited Partnership Agreement

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Basic Structure

A limited partnership fund will be structured broadly along the following lines:-

The general scheme will be for the investors to become limited partners and fund the limited partnership by

agreeing to contribute a small amount of capital and to lend up to a specified amount which can be called for in

tranches, as and when investments are to be made in target companies. When disposal proceeds arise

from the realisation of investments, the investors’ loans will first be repaid and any profit beyond that will be

divided between the investors and the manager in accordance with the agreed profit sharing arrangements.

The manager will be paid a management fee from the outset and will be entitled to a performance related

share of profits on realisation of investments (a “carried interest”).

The general partner will be responsible for running the limited partnership, but will often appoint an associated

entity as investment manager (“the manager”). The manager may provide advice to the general partner rather than

to the limited partnership direct and the executives responsible for managing the fund may be employed by the

manager as well as having a stake in the partnership. (Throughout these Notes, the expression “manager” is used

in a general sense to refer to those running the fund without distinguishing, save where necessary, between the

responsibilities of the general partner, the investment manager and the executives.)

At the end of the fund’s life, the partnership will be wound up and any remaining investments will be handed over

to the investors and manager to hold direct.

The manager may issue an Information Memorandum to gauge interest in a proposed fund and subsequently

issue a draft of the LPA to interested investors. Some of the investors might have suggestions to make on the

terms of the LPA to suit their particular needs and any amendments will be circulated to investors prior to their

agreeing to invest. When the terms of the LPA have finally been settled, investors will sign up to the LPA, binding

them to its terms. Investors may sign up to the fund over a period and provision might be made for investors to

come into the fund after it has started to make investments. Certain US investors might not be able to sign the LPA

until it is ready to make its first investment and provision will be made in the LPA for admitting partners in such

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circumstances. The arrangements for the individuals who manage a fund to take their performance related share

of profits from successful investments will differ from fund to fund. Funds might be structured to allow the

individuals to participate through a special limited partner vehicle which is entitled to a share of capital profits, but

not obliged to lend funds to the partnership, or by allowing the individuals to co-invest their own money in equity

in target companies or in various other ways or combinations of ways.

The management fee may be structured as a share of the limited partnership profits (often referred to as a “priority

profit share”) to be paid out to the general partner in priority to profits going to the limited partners and, in the

early years of the fund, the limited partners may fund this profit share until the partnership starts to generate profits.

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1. Parties

This clause identifies each person who is party to, and therefore bound by, the LPA. The initial parties might

be just the general partner and one limited partner with the remainder of the investors being admitted to the

partnership by signing a separate deed (a “Deed of Adherence” or “Application Form”) which sets out their

agreement to adhere to the terms of the LPA.

2. Introduction (or Recitals)

This clause sets out by way of a general introduction the reasons why the LPA is being entered into by

the parties.

3. Definitions and Interpretation

For ease of reference, defined terms used throughout the LPA are gathered together at the front of the

document. The accepted practice is to capitalise defined terms (e.g. Accounting Period) in the text so that

they can be recognised as having a defined meaning. Further rules may be set out on how the LPA should

be interpreted.

4. Name and Place of Business

These self explanatory statements are required by law. A limited partnership must have a name. The

name and the principal place of business, together with other details, must be registered with the Registrar

of Companies.

5. Establishment

The information contained in this section will differ between LPAs. A clause which is usually included is one

which provides for the partnership to be registered as a limited partnership with the Registrar of Companies

in accordance with the Limited Partnerships Act. Should a limited partnership not be registered as such, the

LPA will have effect as a simple partnership agreement i.e. the investors will be treated as general partners

and will not benefit from limited liability status.

6. Purpose of the Partnership

This clause will reflect the description of the fund as set out in the Information Memorandum and will bind

the general partner to carry on the fund’s investment activities accordingly. This clause may touch on

investment constraints and limits within which the general partner should operate its investment policy or

simply state that the partnership is to “carry on the business of an investor” with the purpose of the

partnership being referred to elsewhere in the LPA (see paragraph 28).

Clauses

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7. Duration of Partnership

The LPA will set out a specific period for the life of the partnership. Typically, this will be ten years from the

first date on which sufficient investors commit to invest the required minimum aggregate amount for the

fund to be established (“first closing date”). Provision will usually be made for extending the life of the

partnership. The circumstances in which this might occur could include where the general partner

recommends that investments continue to be actively managed prior to disposal, rather than simply being

distributed to the partners.

The LPA will provide that any initial term and any extension period is registered, as is required by statute. If

the LPA does not stipulate the term, the general partner will be able to terminate the partnership at any time.

8. Capital and Loan Contributions

Limited partnerships are invariably funded by each investor making a capital contribution of a nominal

amount only and the rest of its investment by way of a loan to the limited partnership. The reason for this is

that the capital contribution represents the amount of the liability of each limited partner to third parties and

that liability remains, even if the capital is returned to the limited partners. On the other hand, whilst the

investor is liable to the partnership for the full amount of its loan commitment, that liability will cease after

the loan commitment has been met, even if the loan is subsequently repaid. The contribution may be

expressed as a commitment unit. For example, an investor may be offered the opportunity to acquire a

minimum number of units at, say, £1,000 each with each unit comprising 10p of capital contribution and

£999.90 of loan contribution.

Limited partnerships may work on the basis that funds are called for or drawn down in stages or tranches. It

is quite common for funds to be drawn down only when needed to make an investment. When the fund is

formed, the capital contributions will be made and the first tranche of the loan commitment will be called for

in order to meet the formation and other initial expenses of the partnership. Thereafter investors will be

notified when further funds are to be drawn down to make investments or to meet agreed expenses of the

partnership. The LPA will set out the circumstances in which loans, having been repaid out of the disposal

proceeds of realised investments, might be drawn down again. The LPA will state the date, usually by

reference to a particular anniversary of the establishment of the fund, when loan commitments can no

longer be called upon. The mechanics under which the limited partners are notified of the requirement to

advance funds to the partnership will be set out, as will the penalties for failure to comply with a draw down

notice. In order to cater for investors committing to invest in the partnership at different times during the

fund raising period, the LPA may allow new partners to be admitted over a specified period from the date on

which the first limited partner is admitted. Certain US investors (in particular, US pension plans subject to

ERISA–see paragraph 32) might be prohibited by US law from becoming limited partners until a qualifying

investment is to be made. This will usually be catered for in the fund raising period provisions. Where a new

partner joins the partnership after loan commitments from existing limited partners have been drawn down,

provision for adjustments to achieve financial parity between partners will normally be made, reflecting that

money has been put into the fund by investors at different times.

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9. Loan Commitment

The LPA will provide that nothing beyond an investor’s agreed total commitment can be called for by the

partnership. Indeed, as a commercial matter, it is common for the investor never to reach the position of having

the entirety of its total commitment invested in the partnership at any one time, due to the period of time taken

to make investments overlapping with a period in which realisation proceeds are returned to the investors.

Investors may take this into account in determining their investment “weighting” in private equity investments.

The LPA may also specify a cut-off date beyond which no further calls to draw down loans will be made,

either by reference to a specific date or the time at which the manager considers the fund to be fully

committed. The cut-off may allow for contingency funding to be called, for example, to meet partnership

expenses or investment commitments or to make follow-on investments.

The LPA will typically provide that once investments made by the partnership are realised, the proceeds

must be used in meeting partnership expenses, including payment of the management fee, set aside for

contingencies or distributed to the partners.

The partnership may also be allowed to reinvest part of the proceeds of realisation of investments in

specified circumstances and amounts. For example, the partnership might be able to reinvest the proceeds

of realisation of an investment where an exit is achieved shortly after making the investment, or the

partnership might be entitled to reinvest proceeds up to an agreed percentage of the total funds raised, or

might be entitled to reinvest up to an amount equal to management fees and expenses so that the

partnership ends up investing the full commitment (rather than the full commitment less management fees

and expenses).

The partnership may also be free to reinvest amounts drawn down from partners to provide bridge

financing. Bridge financing occurs, for example, where the manager does not have time to syndicate or put

together a leveraged finance package before completing an investment. The partnership will provide

“bridge finance” to complete the deal and be repaid this amount when a permanent finance structure is put

in place.

10. Allocations, Sharing and Distributions of Partnership Profits

These clauses govern the order in which partners’ loans are repaid, partnership profits are allocated, the

ratio in which the partners share profits as between themselves and, as a separate matter, how the profits

are to be distributed to the limited partners and general partner, respectively.

The allocations clause determines a partner’s entitlement to a share of income, gains, losses and so on, and

therefore governs how the partners are taxed. It is this clause which effects an adjustment to the proportions

in which the capital gains tax base cost of investments is shared when the carried interest holders become

entitled to their share of the partnership profits.

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The distributions clause determines the order of cash distribution which might typically be:-

(i) payment to the general partner of its “priority profit share”(i.e. the management fee);

(ii) repayment to the limited partners of their drawn-down loans to the partnership;

(iii) where agreed, payment to the limited partners of a return on their investment calculated by reference to

the cost of money over time in a risk-free investment (often referred to as a “preferred return”); and

(iv) thereafter the profits will be divided between the limited partners and the manager in accordance with

the carried interest provisions.

The proportions in which limited partners are repaid loans and, where applicable, paid a preferred return as

between themselves will be by reference to the amount drawn down by the partnership from each partner.

There may be provisions in the clauses dealing with the draw-down of loans from a limited partner which

require that a limited partner who defaults in meeting a draw-down request will have its participation in

distributions reduced or removed and the other limited partners will have their share of distributions

increased proportionately.

11. Carried Interest

“Carried interest” (or “carry”) is the term used to describe the manager’s performance related share of

profits from fund investments. The most commonly used methods of calculating the carried interest are

referred to as “whole fund” and “deal by deal” carry.

On the “whole fund” model, the limited partners must be repaid all of their drawn-down loans (and, where

agreed, their preferred return) before the manager’s carried interest begins to operate.

There may also be provision for a “catch-up” in the distribution clause. This is intended to ensure that those

entitled to the carried interest also share in the preferred return and are given an amount equal to the sum

that they would have received had they been able so to participate, so that the actual split of total fund

profits reflects the overall profit split that has been agreed.

It is common to see in distribution clauses a requirement that once the preferred return has been paid out,

100% (or some other agreed percentage) of the profits accruing thereafter is to be paid out to those entitled

to the carried interest until they have received an amount equal to their share of the total of the preferred

return and the amount paid out under the catch-up clause. Thereafter, profits are distributed in the agreed

ratio between the limited partners and the carried interest holders.

Where a fund operates a “deal by deal” carry, the carried interest is calculated on the basis of the return

achieved by each specific investment. On the realisation of an investment by the fund, the carried interest is

calculated by measuring the income received on, and disposal proceeds of, that investment against the

portion of the limited partners’ loans applied (and expenses incurred) in making that investment. If a hurdle

exists, the preferred return will apply only to the portion of the loans applied in making that investment.

There may be some form of test, perhaps looking at earlier losses and the underlying value of the remaining

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portfolio, which has to be satisfied before the carry begins to operate and there may also be a clawback

mechanism to ensure that the overall split at the end of the fund’s life reflects the agreed profit sharing ratio.

Provision may, in some cases, be made for the clawback of the carried interest (less any tax adjustment),

underpinned, where appropriate, by a payment mechanism to ensure that the holders of the carried interest

repay profit distributions in the event that other assets of the partnership are sold at a loss.

12. Appointment and Removal of the General Partner

The general partner will be formally appointed in the LPA, the relevant clause specifying that the general

partner will act in accordance with the provisions of the LPA.

As the general partner will have been responsible for promoting the fund with a view to profiting from

running the fund over its life, removal of the general partner will usually only be possible for “cause” i.e. on

the grounds of gross negligence, misconduct, fraud or the incapacity (meaning bankruptcy, insolvency,

dissolution or winding up) of the general partner.

As regards procedure for removal, the clause might state that the general partner is given notice in advance

of removal by a specified majority of the investors, in which case both the date for removal and the matters

giving rise to removal are specified. The general partner might then be able to challenge this notice and to

appoint an arbitrator to determine the validity of the removal. The LPA may provide that no further

investments are to be made by the general partner after notice of removal has been given. The general

partner will not normally be entitled to withdraw from the partnership or to resign unless continuing to act

would be contrary to a law or regulation.

Whilst there is no established practice in this area, if investors are concerned that a fund is heavily dependent

upon the performance of certain members of the management team, it may be appropriate for the investors

to seek an assurance that a certain number of the manager’s existing team stays in place over the life of the

fund. The mechanics for such “key executive” provisions, if any, will be a matter for negotiation.

13. Powers, Rights and Duties of the General Partner

The LPA will set out the rights and duties of the general partner and authorise the general partner to do

everything necessary to operate the partnership, including appointing an investment manager and

representing the partnership in its dealings with the manager. The framework within which the general

partner must operate may include restrictions on what investments the partnership can make (for example,

restricting investments to certain geographical regions) and on the maximum size of an investment (often

expressed as a percentage of the total funds raised) in order to ensure the agreed spread of investments.

The general partner will need to be properly authorised by regulatory authorities to carry out its duties

within the jurisdictions in which it operates, or will need to appoint an authorised investment manager to

carry out those functions on its behalf.

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14. Powers of Limited Partner

The LPA will exclude the limited partners from having any rights to manage the partnership to ensure that

their limited liability is maintained under the Limited Partnerships Act.

15. Withdrawal of Partners

This clause deals with the situation where the participation of an investor in one or more investments made

by the partnership becomes unlawful or will have a material adverse effect on that investor’s tax or other

affairs or on the partnership itself. The investor may, in such circumstances, want to be able to withdraw

from the partnership or, alternatively, the partnership may want to be able to expel the investor from the

partnership. It may be that an investor cannot participate in a certain investment to be made by the

partnership, say, for example, on ethical grounds, and therefore it will want the right to be excused from

draw-downs in respect of that investment.

If an investor withdraws or is expelled from the partnership, there will be provisions dealing with how to

value and pay for its partnership interest.

16. Borrowing and Bridge Financing

The general partner may take power on behalf of the partnership to borrow or to hedge investments made

in other currencies, subject perhaps to some form of limit by reference to the loan commitments made to

the partnership.

In certain circumstances, the partnership might borrow to finance time-critical investments pending draw-

down from limited partners and, possibly, syndication to third parties, although such borrowings raise tax

issues for certain US investors (see paragraph 32).

Where the manager does not have time to syndicate or put together a leveraged finance package before

completing an investment, the partnership may be entitled to provide bridge finance to complete the deal.

The bridge financing will be repaid to investors when the permanent finance structure is put in place. Often

no preferred return will run on amounts drawn down and repaid for bridge financing purposes and the

repaid amounts may be capable of being drawn down again and reinvested.

17. Establishing a New Fund

In order to prevent the manager setting up a new fund while money in the existing fund remains uninvested,

a restriction may be placed on the manager’s ability to set up a new fund until an agreed percentage of the

existing fund’s money has been spent. In order to give continuity between funds, some leeway is necessary

so that the existing fund does not have to spend all its money before the manager can start the sometimes

lengthy process of raising a new fund. Overlap arrangements might also be included, for example, to govern

the proportions in which an existing and a new fund may participate in an investment opportunity which

arises while both funds are in existence.

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18. Co-Investment Rights

Some funds may give the manager a discretion to allow investors (or only some of the investors) the right to

invest alongside the partnership in a target company where the manager decides that the partnership will

not take the entirety of a particular investment opportunity. Co-investment rights might be given, for

example, to recognise the contribution being made by the fund’s sponsors or by a cornerstone investor who

agreed in advance to support the launch of the fund. This clause will set out the mechanics for co-

investment or, alternatively, make a more general statement allowing co-investment.

19. Fees and Expenses: Management Fee, Establishment Costs, Transaction Costs, Fee Income

Management Fee (Priority Profit Share)

The manager will usually receive from the partnership an annual management fee; the fee for the period

during which investments are being made may be expressed as a percentage of total funds committed to

the partnership. The management fee may be payable quarterly, six monthly or annually in advance. The

management fee is intended to compensate the manager for operating the partnership and to cover the

partnership’s costs and expenses.

Establishment Costs

The LPA will deal with payment of the costs and expenses involved in establishing the partnership, which

will include legal and accounting advisers’ fees and any fees payable to third party placement agents.

Establishment costs will normally be borne by the partnership, perhaps up to a capped level and this will

often be expressed as a percentage of total funds committed, with establishment costs above a cap being

borne by the general partner.

It is common practice for the general partner to bear the fees of third party placement agents.

Transaction Costs

The LPA will deal with costs incurred by the manager in connection with proposed investments, such as

legal and accounting advisers’ fees. Usually, the costs of a successfully completed investment will be borne

by the target company. Where costs are incurred in trying to make an investment which is not successfully

completed, the manager will, where possible, generally seek to charge such costs to the target company by

agreeing a break-up fee for the transaction.

Where costs are not met by the target company, they will either be borne by the manager or by the

partnership, or split between them.

Fee Income of the General Partner

As part of its investment business, the manager is likely to receive fee income from various sources, such as

arrangement fees, corporate finance fees, commitment fees and monitoring fees.

The LPA will provide that these fees are retained by the manager or shared between the manager and the

partnership. If the partnership is to benefit from the fees, this is usually done by way of offsetting the fees

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against future management fee payments (the Priority Profit Share) rather than making a direct payment to

the investors, as this could give rise to tax problems for certain US investors.

20. Transfer of Interests - Limited Partners and General Partner

Different rules on transferring partnership interests may apply to the general partner and the limited

partners. Whilst the Limited Partnerships Act allows the assignment of a general partner’s share without the

consent of the limited partners, in the case of private equity and venture capital funds, there may be

constraints on the general partner transferring its rights and obligations as general partner in certain

circumstances. The LPA might also provide that the general partner will not take any action which might

cause the general partner no longer to be “associated” with the manager. (This provision may be contained

in a separate “Change of Control” clause.) Should there be a special limited partner holding the manager’s

carried interest, some form of consent might be required for a transfer of that partner’s interests. A limited

partner wishing to assign its share may be able to do so, provided that certain conditions are fulfilled and the

written consent of the manager is obtained. The conditions are intended to protect the remaining limited

partners and would typically require a legal opinion to the effect that the assignment would not adversely

affect the partnership and/or a legal opinion on the position of the transferee (more particularly, that it

would not breach US tax/investment law provisions); and that the limited partner transferring its interest

would provide the general partner with all relevant information about a new limited partner. The LPA may

provide that consent is not required where the transfer/assignment of a limited partner’s interest is from a

trustee to a beneficiary or from a limited partner to an entity under common control (provided there are no

adverse legal or regulatory consequences). It is usual for the LPA to stipulate that the transferring limited

partner will be responsible for all costs associated with the transfer and that the transferor will remain liable

for any contributions called for up until the time that the new limited partner is registered. As the assigning

limited partner may not have had its full commitment drawn down, it will be important for the partnership to

be satisfied that the assignee is good for the balance of the commitment.

Pre-emption rights may be included in the LPA, such that limited partners may only transfer their interests

(other than to associates) after they have offered them to other partners and there may also be a set way in

which this has to be done e.g. time periods during which pre-emption rights may operate before the

interests of the transferring limited partner can be transferred.

The LPA may also state a date from which any transfer is treated as being effective. This is usually the date

on which the transfer is registered and a notice has appeared in the Gazette indicating that the transfer has

occurred. The transferee will be required to sign a Deed of Adherence to the LPA and will then become a

limited partner in place of the transferor.

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21. Termination of Partnership

Dissolution

This clause will usually provide that the partnership will not be dissolved should one of the limited partners

become bankrupt (this is the general position under English partnership law), but it may provide that the

partnership dissolves on the bankruptcy of the general partner and in certain other events.

Liquidation

This clause provides that on liquidation, a liquidating trustee, usually the manager, is appointed to be

responsible for winding up the partnership. The LPA will state that no further business is permitted to take

place after liquidation proceedings have started other than the winding up of the affairs of the partnership.

This clause will also state that the liquidating trustee is permitted to sell the assets of the partnership on the

best terms possible and will set out the order of payment of the monies received from the realisation of

those assets. The costs of the liquidation will be included in this order of payments. The LPA may also

provide for an indemnity for the liquidating trustee should any other costs arise as a result of the liquidation,

that the liquidating trustee will not be personally responsible for the return of the loans from the partnership

assets and that no partner will be liable to another for the repayment of that partner’s outstanding loan.

Termination

The termination clause will specify a number of events upon which the partnership is deemed to come to an

end. They may include: the bankruptcy, insolvency, dissolution, removal or expulsion of the general partner

(the partnership may be stated to be automatically dissolved in such circumstances); notice being served on

the general partner by the limited partners that there has been a material breach of the LPA or gross

negligence on the part of the general partner; on agreement between the limited partners and the general

partner; on a change of law which makes the continuation of the partnership unlawful; if a law governing the

LPA or the effectiveness of the LPA has been breached; on expiry of the term of the partnership or if the

manager determines that the partnership assets have negligible value. The clause is also likely to specify

that no partner is liable to any other partner for a portion of an outstanding loan that has not been repaid by

the partnership.

The termination clause may also specify certain events that are deemed not to be termination events e.g. the

assignment of a partnership interest, admission of a new limited partner or withdrawal of a limited partner.

The termination clause may be supplemented by a provision that as long as certain conditions are fulfilled

(most usually the consent of a certain percentage of partners and sometimes the appointment of a

replacement general partner), the partnership may continue for a further specified period.

22. Follow-on Investments

The partnership may agree to make follow-on investments in an existing portfolio company. This might be,

for example, part of a buy and build strategy, to finance an acquisition or to provide extra working capital.

The partnership would generally be entitled to make follow-on investments, subject to a limitation on the

maximum percentage of funds that may be invested in any one portfolio company. The LPA will often

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provide that follow-on investments may be made after the end of the primary investment period of

the partnership.

23. Accounts and Reports

The manager will prepare accounts for the partnership. (These accounts are not a public document.) The

manager will prepare separate records for each limited partner to enable each to track capital contributions,

loan payments and repayments, income received and capital profits. This is most often done by way of

creating separate accounts under each heading for each limited partner. In addition, regular reporting of the

investments acquired and disposed of may be given to limited partners at an agreed frequency.

The BVCA has produced Reporting Guidelines and Valuation Guidelines for Private Equity and Venture

Investments, which many funds follow.

The manager may also provide, perhaps on request, the information necessary to enable each limited

partner to make its tax returns or to meet any other governmental requests for information. A sweeping up

provision might also be included to ensure that the manager keeps the limited partners informed of any

material matters which might affect the fund.

24. Meetings of Investors

The general partner will usually convene annual general meetings of the investors and be entitled to

convene an extraordinary meeting at any time. In addition, investors holding a certain percentage of total

commitments to the partnership may be entitled to requisition an extraordinary meeting.

The provisions for convening and holding a meeting of partners and passing resolutions may often be similar

to the equivalent provisions for meetings of shareholders in a company.

25. Consents, Meetings and Votes

Whilst it is important that limited partners do not take part in the management, some constraints on the

general partner’s powers may be included requiring the general partner to obtain limited partners’ consent

before taking certain actions.

The procedure for passing partnership resolutions will vary from partnership to partnership. A resolution

passed at a general meeting may be specified to be adopted if approved by limited partners whose

aggregate commitments represent a certain percentage of the total commitments of the fund. There may be

provision in the LPA that allows a resolution to be passed only if a certain composition of votes is cast in

favour e.g. a certain number of limited partners. These different consent requirements may be set out at the

beginning of the LPA as defined terms e.g. “Unanimous Limited Partners’ Consent”. The LPA will also

specify the mechanics for giving consent. Should the partnership be set up in parallel with other

partnerships, the LPA may provide that resolutions will be validly passed only if approved by each of the

parallel funds.

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26. Representations and Warranties

Representations and warranties may be made by the general partner and/or the manager and will be made

by the limited partners. Representations and warranties made by the limited partners are made either in the

Deed of Adherence, in the main body of the LPA or in a side letter.

The representations and warranties made by the general partner, if any, would be intended to give comfort

to the investors that the fund is being established on a proper basis and that all matters material to them as

prospective investors have been brought to their attention. This clause might include: that there is no

current litigation against the fund; that no further authorisation to set up the partnership is required; that all

action has been taken to enable investors to join the partnership; that the partnership is a duly organised

and existing limited partnership; that the general partner has not entered into a side-letter or similar

agreement giving a special deal to some but not all partners and will not enter into such an arrangement,

without first offering the benefit of any arrangements to each of the partners; and that the general partner

will not consent to any material amendment to, or material waiver of, the LPA.

Likewise, each limited partner may be asked to make representations and warranties to give the general

partner comfort that the investor can properly make an investment in the limited partnership. The

representations and warranties might include: that the investor has read the Information Memorandum and

is making the investment relying solely on that information; that it can bear the economic risk of the

investment; that all necessary action has been taken to authorise the execution of the LPA; that it will not, by

executing the LPA, commit any breach under its own constitution; that by executing the LPA it will not

breach any obligations under any other contract; that any information provided for the purposes of applying

to become a limited partner is correct and that it has relied solely on the professional advice of its own

advisors in deciding whether to invest.

27. Advisory Board

Whilst the LPA may provide for there to be an annual meeting enabling investors to ask about their

investments and question the manager, it may also provide for the constitution of an advisory board. The

purpose of this board is to represent the interests of the limited partners. The advisory board may also

advise on other matters such as potential conflicts of interest for the manager and its associated companies

and valuations of portfolio investments. In order to protect the limited partners’ limited liability (they cannot

take part in the “management” of the partnership business and, at the same time, retain their limited liability

status), this board will be specified to be supervisory only. (Indeed, in order to try to avoid infringement of

the UK regulatory provisions and the Limited Partnerships Act, there may be an explicit provision that

members of the board will not take part in the management of the partnership business.) In such

circumstances, the advisory board would not be entitled to force the manager to follow its advice or

decisions. The composition of the advisory board may be fixed by the LPA or the manager may be able to

choose who is to sit on the board. Such boards are usually called the “Advisory Board” or “Investors”

Advisory Committee”.

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Some LPAs provide for there to be an advisory board which is directly involved in the investment process

but whose members are not representatives of the limited partners. The members of this board are usually

chosen by the manager. Somewhat confusingly, this board may be called an “Investment Advisory Board” or

“Investor Advisory Board”.

28. Information Memorandum

The Information Memorandum which prospective investors will have seen at an early stage in the fund

raising process may sometimes be incorporated in the LPA and cross-references might be made in the LPA,

for example, to the investment policy of the fund as set out in the Information Memorandum. The

Information Memorandum is not written in the style of a legal document and for this reason some funds

might choose not to incorporate it, but to set out in the LPA in a more formal and legalistic way, the key

elements of investment policy on which investors would wish to rely.

29. Deed of Adherence

This form is attached to the back of the LPA and will be the template for an application to become a limited

partner. This deed is the formal means by which most investors will apply to become limited partners.

Generally, it will specify the number of commitment units (which are generally in discrete numbers) that an

investor wishes to subscribe for and how that commitment will be divided as between capital contribution

and loan. It may also specify that the investor, having made a successful application, will comply with all of

the obligations contained in the LPA.

It may also contain a Power of Attorney, which will appoint the general partner to act as the investor’s

attorney for the purpose of signing up to any further subscription agreements (see paragraph 33). The deed

may also contain some representations and warranties from the investor.

30. Variation of Agreement

The LPA, once executed, is difficult to alter, as many LPAs will provide that it may be amended only with the

written consent of the general partner and with the consent of a specified majority of the limited partners

(see paragraph 25 on Consents, Meetings and Vote). Proposed amendments which particularly affect a

certain group of limited partners (e.g. those who are subject to US regulatory constraints) may require that

group’s consent. Should an amendment be proposed which increases the liability of any limited partner

(e.g. if it requires limited partners to make further contributions or commitments) or which alters the

allocation or distribution of the income, gains and/or losses of the partnership, the written consent of all

partners may be required. The LPA may provide for the general partner to add to its duties or obligations, to

permit it to make minor clerical or typographical changes to the LPA and/or to add details of the limited

partners to the schedules to the LPA (provided that the investors’ rights and liabilities are not adversely

affected). This clause will typically require a supplemental agreement to be executed if amendments are

to be made and that a copy of this amended agreement be sent to each limited partner within a specified period.

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31. Indemnification of General Partner

The LPA may contain a provision that any indemnified party (any of the general partner, the manager, their

directors and staff and any person who sits on an Advisory or Investment Advisory Board) is not liable for

any loss incurred by the partnership (except where this has arisen as a result of wilful neglect or gross

negligence) and further that any losses incurred by any indemnified party in connection with its

responsibilities to the partnership can be claimed back from the partnership assets together with costs and

expenses. In particular, provision may be made to indemnify the general partner against any tax liability in

respect of tax on other partners’ income or capital gains. A common provision is that neither the manager

nor the general partner will be liable for the negligence of any agent acting for or advising it, if reasonable

care was taken in selecting, engaging and monitoring that agent.

This clause may also require the manager to take out professional indemnity insurance up to a specified sum

and will provide that indemnification payments should be sought from other sources if possible, including

under the indemnity insurance. If the loss can be satisfied in full in this way, then no claim should be made

under the indemnification clause.

32. International Issues

Investors from jurisdictions other than the UK may be subject to local regulatory, tax or other legal

constraints on their investments which may have a knock-on effect on how the limited partnership carries on

its business. The LPA is therefore likely to contain clauses dealing with specific issues arising from having

investors based overseas. The most commonly encountered clauses deal with the following US issues.

Employee Retirement Income Security Act (ERISA)

US pension fund investors are affected by US legislation, in particular, the Employee Retirement Income

Security Act 1974 (ERISA) which is intended, amongst other things, to regulate the investment activities of

the pension funds and their investment managers. Furthermore, the general partner may fall within the US

regulatory net if certain conditions are not met. For these reasons, where investors in a fund are likely to

include US pension funds, the LPA will include fairly extensive provisions allowing limited partners subject

to ERISA to withdraw from the partnership if continued participation would breach ERISA rules. To comply

with ERISA requirements, it may also be provided that the partnership will carry on its activities in such a

way as to qualify as a “venture capital operating company”. To do this, the partnership should make at least

half of its investments (measured by cost) into operating companies in which the general partner/manager

has management rights (such as the ability to appoint a director to the board of that target company). It is

relatively straightforward, in practice, for the manager to ensure compliance with ERISA.

Unrelated Business Taxable Income (UBTI)

US tax exempt investors may suffer US tax on “unrelated business taxable income” (UBTI) from investments

made in tax transparent entities. Further, income arising from third party borrowings made by the

partnership may be treated as UBTI. The LPA might therefore reflect the wishes of certain US investors to

avoid UBTI and include mechanics for so doing.

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33. Miscellaneous Legal Issues

Governing Law and Jurisdiction

This clause will be included for the sake of clarity to govern the applicable law for interpreting the LPA and

which country’s courts will have jurisdiction should a dispute between partners arise. The parties are

generally free to choose the governing law. A further provision may be that each of the parties waives any

objection that the courts in a particular jurisdiction are not a convenient forum for hearing disputes. As these

Notes are concerned with UK-based funds, the LPA choice of law will normally be English law.

Power of Attorney

The LPA may give the general partner power to act on behalf of the limited partners. This may be through a

formal power of attorney contained in either the main body of the LPA or in the Deed of Adherence. The

primary purpose of this power of attorney is to allow the general partner to execute further agreements

admitting other investors on behalf of the limited partners or to make agreed variations to the LPA. Alternatively,

there may be a clause in the LPA which states that the general partner is permitted to sign any documents

admitting new limited partners on behalf of the current limited partners.

Confidentiality

There will often be a confidentiality clause in the LPA providing that any non-public information obtained by

an investor as a result of being a limited partner should not be used to the detriment of the partnership or

any partner. This should not prevent a limited partner from revealing information to its professional advisors

as long as appropriate confidentiality agreements are in place, nor should it prevent a limited partner from

providing information to persons if required by law.

Notices

The LPA will also include a notice provision specifying the mechanism for servicing notice of any party. This

will set out the addresses, telephone numbers, fax numbers and often email addresses of each of the parties

to the LPA. These details are usually set out in one of the schedules and are referred to in the notices clauses.

As well as specifying the medium for service, it will state the form in which notice should be received – for

example, notice in writing. The cause may also specify the time at which notice is deemed to have been

served which may vary depending on the type of notice served.

34. Legal Opinions

Prior to making its investment in the partnership, an investor will want certain comfort in the form of

opinions to be issued by the partnership’s legal advisers in the UK and, perhaps, abroad. In addition to any

specialist opinions required, opinions will normally be needed to cover the following:-

(i) an opinion that an investor in the partnership will have limited liability in respect of its investment. This

liability will be equal to the amount of its capital contribution to the partnership and, in effect, the

amount of its loan commitment which has not been drawn down and repaid;

(ii) an opinion relating to the tax status of the partnership and, in particular, its tax transparency;

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(iii) if there are any investors in the partnership who are governed by the provision of ERISA and those

investors hold a significant proportion of total commitments to the partnership, an opinion from US

counsel that, on the partnership making its first investment, it will qualify as a venture capital operating

company (VCOC) for the purposes of ERISA, together with an annual opinion or certificate to the effect

that the partnership continues to qualify as a VCOC.

35. Document to be signed by Investors

An Investor would expect to sign a Deed of Adherence (or Application Form) to become a partner and be

bound by the terms of the LPA.

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Glossary of Terms

Abort costs Third party costs (e.g. legal and accountancy fees) incurred in connection

with the evaluation and negotiation of any investment opportunity or the

disposal of any investment which does not ultimately lead to the acquisition or

disposal of that investment.

Abort fees A fee which may be agreed to be paid by a target company in the event of an

aborted transaction in order to reimburse some or all of the abort costs.

Advisory board A board of members representing limited partners’ interests which oversees

the activities of the manager. NB. This is distinct from an “Investment Advisory

Board” which may feature in some limited partnerships and which is directly

involved in the investment decision making process.

Application form The document by which investors apply to become limited partners and agree

to be bound by the terms of the LPA.

Break-up fees See Abort fees.

Bridge finance A short-term investment made by the limited partnership in a portfolio company

pending syndication of the investment or agreement of debt financing.

Broken deal costs See Abort costs.

Buy-out fund A limited partnership set up for the purposes of institutional or management

buy-outs. An institutional buy-out (or buy-in) is the purchase of a company by

a limited partnership following, or as part of, which the incumbent or new

management will be given or acquire a small stake in the business. In a

management buy-out (or buy-in), current/new management usually acquire a

more significant shareholding in the business they manage.

Capital contribution One of the two contributions made by each investor to finance a limited

partnership (the other being “loan contribution”). As an investor’s liability to

third parties as a partner is capped according to its capital contribution, this

part of its investment is usually very small.

Carried interest or Carry The performance related share of a private equity fund’s profit that will accrue

to the manager.

Catch-up A mechanism set out in the LPA by which, after any preferred return has been

paid out, those entitled to receive the carried interest may receive a specified

percentage of the profits until they have received an amount equal to their

share of the total of the preferred return.

Co-investment rights A right given to some, but not necessarily all, investors to co-invest their own

money alongside the partnership in a particular target company; or a right

given to executives or the manager to co-invest their own money in a target

company; or a right given to a third party to invest in a target company

alongside the partnership.

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Commitment The total amount to be contributed by each limited partner to the limited

partnership i.e. the total of the capital contribution and the loan contribution.

Commitment period The time period during which investors’ funds can be drawn down by the

limited partnership, calculated from the inception of the fund.

Cornerstone investors Investors who agree in advance to support the launch of a new fund.

Deal-by-deal carried interest A carried interest structure where the performance related profit share

accruing to the manager is calculated by reference to the investment in, and

return from, each specific investment.

Draw-down The payment by the investors of a tranche of their respective loan

commitments following a call from the manager.

ERISA The Employee Retirement Income Security Act 1974 (US legislation – see

paragraph 32 on International Issues).

Establishment costs The costs associated with establishing the partnership. These will include,

although not be limited to, all legal and accountancy expenses.

Excused investors Investors who may be excused for ethical or constitutional reasons from

investing in a certain type of investment or target company.

Exit Where the partnership realises, in whole or part, one of its investments.

Final closing date The last date on which new investors may be admitted to the partnership.

First closing date A date specified in the LPA by which a required minimum aggregate amount

must have been committed by investors for the fund to be established.

Follow-on investments Subsequent investments made by the limited partnership in the same target

company.

Fund-wide carried interest A carried interest structure where the investors must be repaid all of their

existing drawn-down loans and, where appropriate, preferred return before

any carried interest is payable.

General Partner The partner, owned generally by the manager or executives who manage the

fund, which is responsible for operating the limited partnership and whose

liability is unlimited.

Hurdle The minimum return to investors to be achieved before any carried interest is

payable. A hurdle rate of 10% means that the partnership needs to achieve a

return of at least 10% per annum on drawn-down loan commitments before

the profits are shared according to the carried interest arrangement.

Information Memorandum A document circulated to potential investors setting out the investment

strategy and other important commercial features of the proposed fund and

used for marketing the fund to potential investors.

Initial closing date See First closing date.

Investment period See Commitment period.

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IRR Internal rate of return or rate at which positive and negative cash flows to and

from the limited partnership are discounted so that their net present value is

zero. This calculates the returns on the investments and is therefore an

important indicator for appraising performance.

Limited partner An investor in a limited partnership whose liability is capped at the amount of

its capital contribution (and, effectively, the amount of its loan contribution

which has not been drawn down and repaid).

Loan commitment/contribution The loan to be made by a limited partner to the limited partnership as part of

the partner’s commitment to invest. This part of the commitment is usually

drawn down in tranches throughout the Commitment period.

LPA Limited partnership agreement.

Placing agent A third party agent who is paid a commission for finding investors for a fund.

Portfolio company A company in which the limited partnership invests.

Primary investment period See Commitment period.

Priority profit share The management fee paid to the general partner from the partnership.

Private equity fund A buy-out fund or a venture capital fund.

Sponsors/Founder partners Individuals and/or companies who promote the establishment of the fund.

Target company See Portfolio company.

Transaction costs Costs incurred by the manager in connection with proposed investments (this

includes both fees which a target company may agree to pay and Abort costs).

UBTI Unrelated Business Taxable Income (see paragraph 32).

Venture capital fund A fund which makes early stage equity investments in unquoted companies.

Whole-fund carried interest See Fund-wide carried interest.

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