lpa-redline

name

lpa-redline

description

Use when an LP is reviewing a draft Limited Partnership Agreement (LPA) and needs concrete, redline-style suggestions for LP-favorable rewrites — clause by clause, with negotiation rationale, market-standard fallbacks, and ILPA / market precedent. Produces a structured redline package ready to hand to legal counsel. Builds on `fund-of-funds-diligence`'s `lpa-redflag-checklist.md` (which identifies WHAT to negotiate) by specifying HOW to redraft it. Covers economic terms, governance, reporting, indemnification, conflicts, successor-fund restrictions, and impact-specific provisions. Designed for FoF allocators, family office LPs, endowment / foundation / DFI staff, and impact-mandate allocators.

LPA Redline — clause-by-clause LP-favorable rewrites

This skill flags issues for negotiation. It does not replace legal review. Route the final LPA — and any side letter — through qualified fund-formation counsel before signature.

When to use this skill

Trigger this skill when:

• An LPA draft (or term sheet, or summary of key terms) is in hand and the LP needs to mark it up
• The user asks "draft my markup," "what should I send back to GP counsel," "redline this LPA," "what's the LP-favorable language for X," or "what should we ask for on carry / fees / clawback / key-person"
• A side-letter negotiation is underway and standard LP-favorable language is needed
• A re-up is being negotiated and the LP wants to upgrade terms from the prior fund's LPA
• An impact-aligned LPA needs mission-lock and impact-reporting provisions inserted

This skill builds on fund-of-funds-diligence — specifically its lpa-redflag-checklist.md asset. That checklist tells you what is GP-friendly. This skill tells you how to redraft it. Run the red-flag checklist first; then come here for the markup.

Design principle

For every clause flagged as GP-friendly or non-standard, produce four things:

1. Current GP language — quote or paraphrase the draft term
2. Suggested LP-favorable rewrite — concrete drafting suggestion (in plain-English drafting notes, not as final legal text)
3. Market-standard fallback — what to settle for if the GP pushes back; the bright line below which the LP should not concede
4. Negotiation rationale — the ILPA principle, market precedent, or economic argument the LP is invoking; one or two sentences the LP can paste into an email to the GP

This is the unit of work. Every section below follows that pattern.

Coverage areas

The redline must address every section below, in order. For each, identify whether the draft is LP-favorable / standard / GP-favorable / disqualifying, then produce the four-part redline if action is needed.

1. Management fee structure

• Rate (committed vs invested basis); step-down timing and basis (invested capital, NAV, net of write-offs)
• Step-down trigger (end of investment period vs successor fund's first close, whichever earlier)
• Fee on aggregate commitments vs net of partner distributions
• Subsequent closer interest and catch-up mechanics
• Treatment of transaction, monitoring, directors', break-up, and advisory fees — push for 100% offset against management fee
• Treatment of placement-agent fees — should sit at management company, not the fund

2. Carried interest & waterfall

• 20% standard; deviations require justification
• European (whole-fund) vs American (deal-by-deal) waterfall — European preferred
• Hurdle / preferred return (typically 8% PE/infra, often absent in VC) — compounded annually
• Catch-up mechanics — 80/20 catch-up preferred over 100% GP catch-up
• Clawback — full, gross of taxes, with interest at risk-free rate or higher, escrow or guarantee backing
• Joint-and-several vs several-only GP clawback liability — push for joint-and-several backing

3. GP commitment and funding

• Minimum 1-2% of fund size; 2-5% for genuine alignment
• Source of GP commitment — out-of-pocket preferred over management-fee-waiver or borrowed
• Funding schedule — pari passu with LPs, not deferred
• GP commitment maintained through extensions

4. Investment period and key-person provisions

• Investment period length (typically 4-5 years for PE, 3-4 for VC) — not extendable without LP consent
• Key-person clause — minimum 2-3 named partners, with time-and-attention requirement
• Automatic suspension on key-person event; reactivation requires LPAC or LP-majority approval
• Cause for early termination of investment period — material breach, fraud, gross negligence
• "Time and attention" definition — substantially-all-business-time standard

5. Removal & no-fault divorce

• No-fault removal — 75% in interest of LPs (not by headcount); standard is supermajority by capital
• For-cause removal — 50% threshold with broad "cause" definition (material breach, fraud, gross negligence, willful misconduct, criminal indictment)
• Removal carries forfeiture of unvested carry; vested carry treatment varies
• No termination penalty payable to GP on for-cause removal
• Replacement GP selection — LPAC plus majority LP vote

6. Reinvestment / recycling

• Cap on recycling (typically 110-120% of commitments) — uncapped is GP-favorable
• Recycling only during investment period
• Recycling only of short-term realizations (within 12-18 months) — not long-held distributions
• No recycling of bridge financings, follow-ons, or return-of-capital distributions

7. Fund extensions

• Standard: two one-year extensions, each requiring LPAC consent
• Push back on: GP-discretionary extensions, longer than two years total, or rolling extensions
• Management fee during extensions — should step down further (often to 0.5% or zero, on NAV)
• No new investments during extensions, only follow-ons and orderly disposition

8. LPAC composition and powers

• Composition: top LPs by commitment, plus rotational seats for mid-size LPs
• Quorum and voting rules — majority of LPAC, with conflicts recused
• Mandatory approval rights — conflict transactions, affiliate transactions, valuation policy changes, key-person replacements, extension consents
• Information rights — quarterly meetings, ad hoc access on material events
• Indemnification of LPAC members by the fund (not the management company)
• No GP veto over LPAC actions within its scope

9. Reporting standards (ILPA compliance)

• ILPA-compliant quarterly reports (capital account statements, performance, fees, expenses, carry)
• ILPA Fee Reporting Template
• Audited annual financials within 90 days of fiscal year-end
• Portfolio-company-level KPI reporting where strategy makes this meaningful
• Look-through reporting for fund-of-funds LPs
• Capital call notices with sufficient detail (purpose, use of proceeds, recipient if direct co-invest)

10. MFN tiers and carve-outs

• Open MFN preferred; tiered acceptable for funds >$1B
• Carve-outs limited to regulatory (ERISA, sovereign, public-pension public-records), excess capacity, and bona fide strategic
• Election period at least 30 days from receipt of complete side-letter package
• All side letters disclosed (redacted for identity only where required)
• Most-favored treatment includes economic AND governance provisions

11. Indemnification and exculpation

• Indemnification standard: not for fraud, willful misconduct, gross negligence, criminal acts, material breach
• Defense costs advanced subject to repayment if found liable for excluded conduct
• Indemnification net of insurance recoveries
• No indemnification for inter-partner disputes
• Exculpation does not cover fiduciary breaches under applicable law (e.g., DRULPA waiver carve-outs)

12. Conflict transactions

• All affiliated / cross-fund / GP-staff transactions require LPAC approval (not just disclosure)
• Conflicts policy attached as schedule; updates require LP notice
• Allocation policy for shared deals across funds — disclosed, audited, enforceable
• No co-investment to GP staff on better terms than the fund
• Continuation-vehicle / GP-led secondary transactions require LPAC consent and independent fairness opinion

13. Successor fund restrictions

• No successor fund marketing until 70-80% of fund is invested, committed, or reserved
• Exclusivity / time-and-attention for keyed partners through investment period
• No new fund in the same strategy during investment period
• LP information rights extend to successor fund marketing materials

14. Impact-specific provisions

For impact-aligned mandates (mission-driven, regenerative, climate, blended-finance, place-based):

• Mission lock — impact thesis stated in LPA recitals; amendment requires supermajority LP consent
• Impact reporting standards — IRIS+ / IMP five-dimensions / GIIN Operating Principles referenced explicitly; reporting cadence and format specified
• Negative screens — exclusion list (e.g., fossil fuel extraction, weapons, gambling, tobacco) embedded in investment guidelines, not just side letter
• Impact-linked carry or fee adjustments — increasingly market in catalytic and blended funds; verify mechanism, gating metrics, third-party verification
• Stakeholder governance — community / worker / beneficiary advisory or veto rights for place-based funds
• Theory of change reference — recitals or schedule that ties strategy to impact thesis; protects against drift
• Drift remedy — what happens if impact KPIs are persistently missed? Reporting escalation, LPAC review, GP-removal trigger

Output structure — redline package

When asked to redline an LPA, format the output as:

## LPA Redline — [Fund Name] [Fund #]

**This is a negotiation flag-set, not legal advice. Route the final LPA through fund-formation counsel.**

### Executive summary
- Total clauses flagged: X
- Disqualifying terms (commit-veto): X
- High-priority asks (would walk if not addressed): X
- Standard asks (expected to be conceded): X
- Nice-to-have: X
- Impact-specific items: X

### Top 5 must-fix terms (by economic / governance impact)

#### 1. [Clause name, e.g., "Management fee step-down"]
- **Current GP language:** [quote or paraphrase]
- **Suggested LP rewrite:** [drafting note — what the language should say]
- **Market-standard fallback:** [bright-line minimum acceptable position]
- **Rationale:** [1-2 sentences invoking ILPA principle / market precedent / economic argument]

#### 2. [...]
[...]

### Section-by-section redline

For each of the 14 coverage areas above where issues exist:

#### [Section name]
| Clause | Current | Suggested rewrite | Fallback | Rationale |
|---|---|---|---|---|
| ... | ... | ... | ... | ... |

### Impact-specific redlines (if applicable)
[As above, for mission-lock, impact reporting, negative screens, etc.]

### Items for side letter (not main LPA)
- MFN tier election
- Co-investment rights
- Excuse / exclusion rights for specific deal categories
- Confidentiality carve-outs for LP regulatory reporting
- Most-favored-nations election mechanics

### Items to flag for legal counsel specifically
- Tax structuring (UBTI / ECI / blockers)
- Regulatory (ERISA plan-asset, AIFMD, FATCA / CRS)
- Jurisdiction-specific fiduciary duty modifications (DRULPA waivers)
- Insurance requirements (D&O, GP errors & omissions, cyber)
- Anti-dilution / preemptive rights on new sleeves or vehicles

### Bottom line
[2-3 sentences: which 2-3 items would cause the LP to walk; which 2-3 are negotiable but worth fighting for; recommended sequencing of the negotiation]

How to run the skill

1. Ingest the LPA (or summary). If only a term sheet is provided, flag that the full LPA review is still required.
2. Run the red-flag checklist first (from fund-of-funds-diligence/assets/lpa-redflag-checklist.md) to triage which clauses need attention.
3. For each flagged clause, produce the four-part redline (current / rewrite / fallback / rationale).
4. Surface drafting language from assets/redline-templates.md for the ten most-negotiated clauses — adapt to the specific draft, do not paste verbatim.
5. Build the redline package in the output structure above.
6. Always close with the legal-review reminder.

When NOT to use this skill

• For initial GP-quality / track-record evaluation — use fund-of-funds-diligence first
• For pure impact / mission evaluation — use impact-diligence
• For deal-level company underwriting on a co-invest — use financial-analysis skills
• As a substitute for legal counsel — this skill is upstream of legal review, not a replacement for it

Chaining with other skills

• fund-of-funds-diligence — run first. Its red-flag checklist identifies which clauses warrant redline.
• impact-diligence — run alongside for impact mandates; the redline picks up mission-lock and impact-reporting requirements from there.
• regen-glossary — use when drafting impact-specific recitals or schedules involving regen / natural capital terminology.

Supporting assets

The assets/ folder contains:

• redline-templates.md — drafting notes for the 10 most-negotiated clauses (fee step-down, carry waterfall, clawback, key-person, no-fault removal, recycling cap, MFN, LPAC powers, successor-fund restriction, mission lock). Use as a starting point; tailor to each draft.

If the asset is not loaded, the SKILL.md body above is self-sufficient at lower precision.

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Reminder: This skill flags issues for negotiation; route the final LPA through legal counsel.