Fund Formation Glossary

The governing document of a fund organized as a limited partnership. It sets out the economics, the general partner’s authority, investor rights and the fund’s life cycle.

In practice. Investors negotiate the LPA through comments and side letters. A manager raising a first fund is better served by an LPA that already reflects what institutional investors will ask for.

See also: General partner, Side letter, Distribution waterfall

Read more: GP/LP Negotiations: Key Terms LPs Push Back On

The entity that controls the fund and has unlimited liability for its debts, which is why it is usually formed as an LLC owned by the principals. It typically receives the carried interest.

In practice. The general partner and the management company are usually separate: the general partner holds the carry, and the management company receives the fee and employs the team.

See also: Management company, Carried interest, GP commitment

Read more: How to Structure a Private Fund

The investment adviser to the fund. It receives the management fee, employs the team and pays its own overhead, such as salaries and rent. Fund-level expenses, such as audit, legal and administration costs, are usually borne by the fund as the LPA provides.

In practice. One management company usually advises successive funds, so its ownership and the economics among the principals deserve their own agreement. How expenses are split between the manager and the fund is a regular focus of SEC examinations.

See also: General partner, Management fee, Exempt reporting adviser

Read more: How to Structure a Private Fund

An investor in a fund organized as a limited partnership. Limited partners commit capital and have limited liability but no role in managing the fund.

In practice. Under Delaware law, serving on the advisory committee and voting on matters the LPA reserves to investors does not cost a limited partner its limited liability, which is why those roles are drafted as consultative rather than managerial.

See also: Limited partner advisory committee, Capital commitment and capital call

Additional vehicles for investors with different tax or regulatory needs. A parallel fund invests alongside the main fund on the same terms; a feeder fund pools a group of investors and invests in the main fund; a blocker corporation sits between certain investors and the fund so that tax-exempt investors avoid unrelated business taxable income and non-U.S. investors avoid income effectively connected with a U.S. business.

In practice. Settle the structure before marketing. Adding vehicles after the first close is expensive and changes the documents investors have already reviewed.

See also: Limited partnership agreement, SPV and co-investment vehicle

Read more: How to Structure a Private Fund

A single-purpose entity formed to make one investment, often alongside a fund or in a deal that is too large or outside the fund’s strategy.

In practice. An SPV needs the same securities law analysis as a fund, plus clear rules for allocating deals between the fund and co-investors.

See also: Parallel funds, feeders and blockers, Rule 506(b) and Rule 506(c)

A commitment is the amount an investor agrees to contribute over the life of the fund. A capital call is the general partner’s notice requiring investors to fund part of that commitment within a short period, often ten business days.

In practice. The default provisions, which can include forfeiture of part of a defaulting investor’s interest, are what give a capital call its force.

See also: Subscription line facility, Investment period

The annual fee paid to the management company for running the fund, commonly calculated on committed capital during the investment period and on invested capital afterward.

In practice. Offsets for transaction and monitoring fees, the step-down after the investment period, and fee breaks for large or early investors are negotiated alongside the headline rate.

See also: Management company, Investment period, Carried interest

Read more: GP/LP Negotiations: Key Terms LPs Push Back On

The general partner’s share of the fund’s profits, traditionally 20 percent, paid only after investors receive the distributions the waterfall requires.

In practice. For the team, how carry is shared, how it vests and when it is forfeited matter as much as the headline rate. Under Section 1061, capital gain allocated on carried interest is long-term only if the asset sold was held for more than three years, generally measured by the fund’s holding period; some income, such as qualified dividends, is outside the rule.

See also: Distribution waterfall, Preferred return, GP catch-up, Clawback

Read more: Structuring Carried Interest and Waterfall Mechanics

The order in which fund proceeds are split between investors and the general partner. A European, or whole-fund, waterfall returns all contributed capital and the preferred return before any carry; an American, or deal-by-deal, waterfall pays carry on each realized investment.

In practice. Deal-by-deal waterfalls pay the team sooner but rely on a clawback to correct any overpayment. Many venture funds use the whole-fund model.

See also: Preferred return, GP catch-up, Clawback, Carried interest

Read more: Structuring Carried Interest and Waterfall Mechanics

The annual rate of return on contributed capital, often 8 percent compounded in private equity funds, that investors must receive before the general partner earns carry. Many venture funds have no preferred return.

In practice. With a full catch-up, a preferred return changes when the general partner is paid, not how much, provided the fund performs well enough to complete the catch-up. Without a catch-up, it reduces the carry itself.

See also: GP catch-up, Distribution waterfall

Read more: Structuring Carried Interest and Waterfall Mechanics

A tier of the waterfall, after investors receive their preferred return, in which most or all distributions go to the general partner until it has received its full carried interest share of cumulative profits.

In practice. The catch-up rate, 100 percent or a shared split, sets how quickly the general partner catches up. Investors with leverage push for a slower one.

See also: Preferred return, Distribution waterfall, Carried interest

Read more: Structuring Carried Interest and Waterfall Mechanics

The general partner’s obligation to return carried interest it received beyond its entitlement, measured over the life of the fund.

In practice. Usually limited to after-tax amounts and sometimes backed by guarantees from the principals or an escrow of carry. Interim clawback tests are a frequent investor request.

See also: Distribution waterfall, Carried interest

Read more: Structuring Carried Interest and Waterfall Mechanics

The capital the general partner and its principals commit to their own fund, which investors read as alignment.

In practice. It is sometimes funded through management fee waivers, an approach that carries tax risk and has to be structured with care.

See also: General partner, Management fee

Read more: GP/LP Negotiations: Key Terms LPs Push Back On

A credit facility secured by investors’ uncalled commitments, letting the fund borrow before it calls capital.

In practice. Useful for timing, but by delaying capital calls it can raise the fund’s reported IRR while its interest cost lowers the net multiple, so investors often ask for limits on its size and duration and for disclosure of its effect.

See also: Capital commitment and capital call

A separate agreement between the fund and a particular investor that grants rights or modifies the LPA for that investor.

In practice. Typical requests include fee discounts, additional reporting, co-investment rights, regulatory and tax accommodations, and excuse rights. Every side letter should be drafted with the MFN process in mind.

See also: Most favored nations election, Limited partnership agreement

Read more: GP/LP Negotiations: Key Terms LPs Push Back On

A side letter right allowing an investor to elect rights granted to other investors in their side letters, usually limited to investors with the same or a smaller commitment.

In practice. Tiering by commitment size and excluding rights tied to a particular investor’s regulatory or tax status keep the election process manageable.

See also: Side letter

A provision that suspends or ends the investment period if named individuals stop devoting the required time to the fund, unless investors vote to continue.

In practice. Managers should define the time commitment realistically and give investors a clear vote to resume, rather than automatic termination.

See also: Investment period, Limited partner advisory committee

Read more: GP/LP Negotiations: Key Terms LPs Push Back On

The period, measured in years from the first or final close, during which the fund can make new investments. Afterward, capital can generally be called only for follow-on investments, expenses and deals already committed.

In practice. Its end usually triggers the management fee step-down, so its length and any extension rights are economic terms.

See also: Management fee, Fund term, Key person provision

The life of the fund, after which it must wind up, usually with limited extensions at the general partner’s discretion or with investor consent.

In practice. When assets remain at the end of the term, continuation vehicles and other GP-led solutions come into play.

See also: Investment period, Continuation fund

A committee of investor representatives that reviews conflicts of interest, valuation questions and other matters the LPA reserves to it.

In practice. The LPA should say exactly what requires committee approval, especially transactions with affiliates, so it works as an approval mechanism rather than an open-ended forum.

See also: Limited partner, Key person provision, Continuation fund

A new vehicle, led by the general partner, that buys one or more assets from an existing fund so they can be held longer, while existing investors choose to sell or roll into the new vehicle.

In practice. The conflict is built in, because the general partner sits on both sides. A fair process, independent pricing and advisory committee approval are what make it defensible.

See also: Fund term, Limited partner advisory committee

The offering document for a fund, describing the strategy, team, terms, risks and conflicts of interest.

In practice. The PPM is a disclosure document, so its risk factors and conflicts sections protect the manager. It has to match the LPA; inconsistencies between them are a source of investor claims.

See also: Limited partnership agreement, Subscription agreement, Rule 506(b) and Rule 506(c)

Read more: Launching Fund I: Legal Costs, Timeline and Fund Counsel

The document each investor signs to commit capital to the fund, with representations about its status as an accredited investor or qualified purchaser and its tax and regulatory profile.

In practice. Clean subscription documents and investor questionnaires save weeks at every closing and support the fund’s compliance with securities, tax and anti-money laundering rules.

See also: Accredited investor and qualified purchaser, Capital commitment and capital call

The first close is the initial admission of investors, after which the fund can invest and charge fees. The final close is the last date new investors can join, often twelve to eighteen months after the first.

In practice. Investors admitted after the first close make equalization payments so they bear their share of earlier investments and fees.

See also: Equalization, Subscription agreement

Read more: Launching Fund I: Legal Costs, Timeline and Fund Counsel

The payments a later-admitted investor makes so that it holds its proportionate share of investments made before it joined, usually with an additional charge paid to earlier investors.

In practice. The rate of the additional charge, and whether it goes to earlier investors or to the fund, are negotiated points.

See also: First close and final close

A broker-dealer that markets a fund to investors for a fee, usually a percentage of the capital it raises.

In practice. Anyone paid a success fee for raising capital generally needs to be a registered broker-dealer. Placement fees are usually borne by the manager, often through a management fee offset.

See also: Rule 506(b) and Rule 506(c)

The securities law exemptions most funds rely on. Rule 506(b) prohibits general solicitation and allows a limited number of non-accredited investors; Rule 506(c) allows general solicitation but requires every investor to be accredited and the fund to take reasonable steps to verify that status.

In practice. SEC staff guidance issued in March 2025 allows a fund to verify accredited status under Rule 506(c) through a minimum investment of at least $200,000 for individuals or $1 million for entities, with written representations that the investor is accredited and the investment is not financed by a third party for that purpose, absent contrary knowledge. That makes public marketing more practical.

See also: Accredited investor and qualified purchaser, Form D, Placement agent

An accredited investor meets the Rule 501(a) test for most private offerings, based on income, net worth, certain professional certifications or, for entities, assets or investor type. A qualified purchaser meets a higher standard, generally $5 million in investments for individuals and $25 million for most entities, and is required for funds relying on Section 3(c)(7).

In practice. Which standard a fund requires determines how many investors it can admit and which Investment Company Act exemption it uses.

See also: Section 3(c)(1) and Section 3(c)(7), Rule 506(b) and Rule 506(c)

The two exemptions most private funds use to avoid registering under the Investment Company Act. A 3(c)(1) fund is limited to 100 beneficial owners, or 250 for qualifying venture funds below a size threshold; a 3(c)(7) fund admits only qualified purchasers and is not subject to the 100-investor limit.

In practice. A fund likely to grow past 100 investors usually needs a 3(c)(7) structure, open only to qualified purchasers, with a parallel 3(c)(1) fund for investors who do not qualify.

See also: Accredited investor and qualified purchaser, Parallel funds, feeders and blockers

A notice filed with the SEC within 15 days after the first sale of securities in a Regulation D offering, with corresponding notice filings in the states where investors are located.

In practice. State notice filings and fees vary, and missing them is a common, avoidable compliance gap.

See also: Rule 506(b) and Rule 506(c)

An investment adviser exempt from SEC registration because it advises only venture capital funds, or only private funds with less than $150 million in regulatory assets under management, which for a U.S.-based adviser counts all private fund assets, including uncalled commitments. Exempt reporting advisers must still file parts of Form ADV.

In practice. State rules apply on top of the federal exemptions, and crossing the $150 million line or adding non-venture strategies can require full registration.

See also: Management company