How the Language in a Partnership (or Operating) Agreement Can Have a Significant Impact on Fund Administration

Often 60 to 100 pages and thousands of words, partnership or operating agreements (“LPAs”) act as the legally binding agreement between the sponsor (“GP”) of a fund and its investors, the limited partners (“LPs”).  From an administrator’s perspective, LPAs are the roadmap for a fund’s life cycle; from formation, through investor onboarding and mechanics for calling and distributing capital, to the final termination and liquidation.  Minor variations in the language of the LPA can have a significant impact on the administration of the fund and ultimate return to each LP.

Take for example, these variations in compounding language, which describe the calculation of preferred returns:

• “Compounded annually”
• “Compounded annually on the anniversary of each drawdown date”
• “Compounded annually at the end of each fiscal year”

While the first and third examples are often interpreted to be the same, a discussion and determination should be had between the administrator and GP as to the intent of “compounded annually,” absent additional clarifying language.  The second and third examples clearly describe different compounding dates and the results will differ.  The complexities surrounding preferred return compounding do not stop here, as additional variations in language often exist that will dictate the start date of preferred return calculations and the rate to be used.

While most LPAs follow a consistent format and contain similar sections, there are seemingly infinite variations in the language that can impact the administration of a fund.  Each section of the LPA can contain variations that require identification and analysis just as presented above.  Often, a single word in a document of thousands can have a significant, and sometimes unintended, impact.

Thanks to Jon Haidet for authoring this blog post. Jon and the entire Outsourced Fund Administration Finance and Accounting Services team possess the necessary experience, knowledge, and systems to customize fund administration processes and calculations to specific real estate or private equity fund needs.  Please reach out to Jon, Andy Huss or Chris Salfi to learn more!