Asked for the LPA before the deck, ended up with a fee break

A sponsor I'd been following for two years opened a $30M value-add fund and had about $8M soft circled for the first close. I asked for the limited partnership agreement and the subscription documents before I looked at the pitch deck, mostly because the deck was going to tell me things I couldn't verify.

The LPA had two classes already drafted. Class A at 2 and 20 over an 8, Class B at 1.5 and 20 over an 8 for commitments in the first close above $250k. My check was $40k, so I asked whether the first close condition could stand on its own without the dollar threshold. They said yes for the initial closing only, and put me in Class B with most favored nation language attached. On a five year fee period that half point is roughly $1,000 a year on my commitment, so about $5,000 before you get to whether the deals work.

What nearly killed it: my attorney quoted $2,800 to review the LPA and the sub docs. That is 7 percent of my commitment, which is absurd on its face. Two other people had come in through the same introduction, so we each paid a third and shared the memo. Whether that arrangement makes sense for anyone else is a question for their own counsel, and mine was fine with it because we're all passive investors reading the same document.

What I'd keep: reading the LPA cold, before I'd formed an opinion about the sponsor. Every question I asked came from a clause. None of them came from the deck.

Answer

1sonia_alvarez Get yoursPRO6

First close discounts exist because the manager needs a critical mass to hold a closing at all, and a first close that comes in thin is a fundraise that stalls. So you were selling something real. The dollar threshold was there to keep small checks from getting institutional terms, and dropping it for the initial closing costs them almost nothing when the alternative is closing $200k lighter.

On the MFN, read the carve-out. Most of the ones I see exclude terms granted to commitments above a stated size, often $5M or $10M, and exclude anything in a side letter about regulatory or reporting requirements. So when the anchor LP comes in at $7M with a 1.25 and a seat on the advisory committee, your MFN election letter will list the terms you are allowed to pick and that will not be among them. Worth knowing before you assume you're riding along on the best deal in the fund. Your attorney is the one to confirm what your specific language covers.

The cost sharing on the review is the part I'd repeat. $2,800 across three subscriptions is $930 each, and the memo doesn't get worse from being read by three people. What I'd add for next time is asking for the prior fund's audited financials alongside the LPA. The agreement tells you what they're allowed to charge the fund. The audit tells you what they actually charged.

Asked for the LPA before the deck, ended up with a fee break

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