Private Equity Funds: What Every Lp and Gp Needs to Know

Most private equity funds are organized as Delaware limited partnerships. The limited partnership agreement (LPA) is the governing document. It defines the investment strategy, fee structure, distribution waterfall, and LP rights. The general partner (GP) manages the fund. The limited partners (LPs) provide capital with no management rights beyond their committed capital.

Private equity funds counsel structures the fund entity formation documents, advises on the allocation of authority between the GP and LP advisory committee, and drafts the limited partnership agreement to reflect the fund's investment strategy, economics, and governance structure.

Buyout funds acquire control positions using leverage. Private credit funds lend to companies that do not access public capital markets. Venture capital funds invest in early-stage companies for minority equity. Growth equity funds invest in companies needing expansion capital. Real assets funds invest in infrastructure, real estate, and natural resources.

Private equity and investment funds counsel advises on fund type selection, structures the investment mandate provisions in the limited partnership agreement, and advises on the fund terms that are market standard for each fund type and how they have evolved across recent fundraising cycles.

Fund managers with more than $150 million in assets must register with the SEC. Registered investment advisers must file and maintain a Form ADV with the SEC. The Form ADV discloses the adviser's business, clients, fees, conflicts of interest, and disciplinary history. Exempt reporting advisers file a shorter Form ADV but must still comply with the anti-fraud provisions of the Investment Advisers Act.

Investment fund regulation counsel advises on investment adviser registration thresholds and exemptions, prepares and maintains the Form ADV, designs the compliance policies and procedures required of registered advisers, and manages SEC examination preparation for private equity fund managers.

Private equity funds do not receive all committed capital at closing. Capital is drawn through capital calls as investments are identified. The LPA defines the GP's authority to call capital and the timeline within which LPs must fund. Defaulting LPs face dilution or forfeiture under the LPA's default provisions. Portfolio company management is the GP's primary activity after investment. The GP appoints board members, monitors financial performance, and drives value creation through operational improvement and add-on acquisitions.

Private investment funds counsel drafts the capital call mechanics and default provisions in the limited partnership agreement, advises on the GP's authority to make follow-on investments after the investment period ends, and advises on the governance rights that the fund exercises through its board representation in portfolio companies.

Private equity funds rely on either the 3c1 or 3c7 exemption from the Investment Company Act. The 3c1 exemption covers funds with 100 or fewer beneficial owners. The 3c7 exemption covers funds whose investors are all qualified purchasers with at least $5 million in investments. Section 3(c)(7) funds are not subject to the 100-investor limit.

Private capital funds counsel advises on the selection of the applicable Investment Company Act exemption, monitors beneficial ownership counts and qualified purchaser status for each investor, and advises on the restructuring steps required when a fund approaches the limits of its chosen exemption.

The Investment Advisers Act, the Investment Company Act, ERISA, and state laws each impose ongoing obligations. ERISA applies when benefit plan investors own 25 percent or more of a fund. A fund that exceeds the ERISA threshold becomes a plan asset fund subject to ERISA's fiduciary standards. Anti-money laundering obligations apply under FinCEN regulations. KYC requirements mandate verification of each investor's identity and source of funds. Exempt reporting advisers must still comply with the anti-fraud provisions of the Advisers Act.

Digital asset regulation counsel advises on exempt reporting adviser obligations under the Investment Advisers Act, evaluates benefit plan investor concentration against the ERISA plan asset threshold, and designs the AML and KYC compliance program required for private equity fund operations.

The standard management fee is 1.5 to 2 percent of committed capital during the investment period. Carried interest is the GP's share of profits above the hurdle rate. The standard carried interest is 20 percent. A whole-fund waterfall distributes all LP capital and preferred return before the GP receives any carried interest. Clawback provisions require the GP to return carried interest if the fund fails to achieve the hurdle rate. Fund economics are the most heavily negotiated section of any LPA.

Investment fund law counsel structures the management fee and carried interest provisions in the limited partnership agreement, advises on hurdle rate structures and the GP catch-up mechanism, and drafts the clawback provisions that protect LPs from carried interest overpayment.

Private equity funds typically have a ten-year term. Exits occur through sale to a strategic buyer, sale to another fund, or an IPO. After each exit, the GP distributes proceeds according to the distribution waterfall in the LPA. Continuation vehicles allow GPs to transfer assets from a fund near the end of its term into a new vehicle. Secondary market transactions allow LPs to sell their fund interests before the fund terminates. Most LPAs require GP consent for secondary transactions.

Venture capital and growth equity counsel advises on exit strategy planning and the timing of portfolio company sales or IPOs, structures continuation vehicle transactions and the associated LP consent process, and advises on the legal and economic terms of secondary market transactions for both sellers and buyers of LP interests.