Fund Terms & Alignment Framework

1. Purpose

This framework is a method for reading the economic and governance terms of a closed-end private fund, chiefly its limited partnership agreement (LPA) and side letters, and for assessing how far those terms make the general partner gain or lose with its limited partners. It explains what each term does, how to calculate its effect, and how it compares with the positions published by the Institutional Limited Partners Association (ILPA) in ILPA Principles 3.0 and the ILPA Model LPA.

ILPA positions are the recommendations of an association of limited partners. They are a fixed reference for comparison. They are not law, and they are not a description of what most funds agree. When this framework records that a term departs from an ILPA position, it records a fact about the document, not a verdict on the term. Nothing here is legal or tax advice.

2. Scope

In scope

• Closed-end funds organised as limited partnerships or equivalent vehicles: buyout, growth, venture, private credit and real assets.
• Economics: management fee base, rate and step-downs; fee income and offsets; fund expenses; carried interest; the distribution waterfall; preferred return and catch-up; clawback, escrow and LP giveback; GP commitment; recycling.
• Governance: the LPAC, key person provisions, removal for cause, no-fault divorce, fund term and extensions, and the side letters and most favoured nation (MFN) clauses that modify these terms for individual LPs.
• How subscription facilities and NAV facilities interact with fees, preferred return and LPAC consent.

Out of scope

• Performance fees and high-water marks in open-end vehicles.
• Tax structuring of the fund and the tax treatment of carried interest; see carried interest taxation.
• Terms of continuation vehicles and other GP-led transactions: see the Secondaries & Continuation Vehicle Evaluation Framework.
• The wider manager due diligence process: see the Institutional LP Manager Due Diligence Framework.
• How fees and carried interest show up in reported returns: see the Private Markets Performance Measurement Standard.

3. Definitions

• Management fee. The periodic fee paid to the manager for operating the fund: a rate applied to a base. Common bases are commitments, invested capital (the cost of investments not yet realised or written off, often called unrealised cost) and NAV.
• Step-down. A reduction in the fee rate, a change of base, or both, at a stated trigger such as the end of the investment period, the start of a successor fund or a term extension.
• Fee offset. A reduction of the management fee by a stated percentage of portfolio company fees (transaction, monitoring, director and similar fees) received by the manager or its affiliates.
• Fund expenses, organisational expenses and broken-deal expenses. Costs borne by the fund rather than by the manager out of its fee; which side bears each cost is set by the LPA.
• Carried interest. The GP's share of fund profits, paid through the waterfall.
• Distribution waterfall. The order in which distributable proceeds are allocated between LPs and the GP. A whole-fund (European) waterfall returns all contributed capital, and normally the preferred return, before any carried interest. A deal-by-deal (American) waterfall can pay carried interest on each realised investment. See European vs American waterfall.
• Preferred return and hurdle rate. The return LPs receive on contributed capital before the GP shares in profits. Under a hard hurdle, carried interest is charged only on profits above the preferred return. Under a hurdle with a catch-up, the GP later receives enough to restore its full share of all profits, once profits are large enough for the catch-up to complete (6.2).
• Catch-up. The waterfall tier after the preferred return in which the GP receives a stated share of distributions (100% for a full catch-up, less for a partial one) until it holds its carry percentage of profits distributed so far.
• Clawback. The GP's obligation to return carried interest received in excess of its entitlement on cumulative results. Carry escrow holds back part of carry distributions as security. An LP giveback obliges LPs to return distributions to meet later fund liabilities.
• GP commitment. Capital committed by the GP and its principals to their own fund. It may be funded in cash or, where allowed, through a management fee waiver.
• Recycling. Reinvestment of proceeds or recall of distributions, within limits set by the LPA.
• LPAC. The limited partner advisory committee, which the GP consults on conflicts of interest and other matters the LPA reserves to it.
• Key person clause. A provision naming individuals whose departure or loss of time commitment triggers protections, usually a suspension of the investment period.
• Removal for cause and no-fault divorce. LP rights to remove the GP, or to end the investment period or the fund, after a defined cause event or without one, by stated votes.
• Most favoured nation clause. A side-letter right to elect terms granted to other LPs, subject to stated exclusions.
• Alignment of interests. The extent to which the terms make the GP gain or lose in the same direction as its LPs.

4. Inputs and source types

4.1 Documents.

4.2 Evidence. A term read from an executed LPA or side letter is OBSERVED, recorded with the clause reference and the document date. A term read from a summary (a placement memorandum, a public pension board memo, a press release) is OBSERVED with that summary as its source and is less specific. Public pension board materials are OFFICIAL_INSTITUTIONAL evidence; a manager's own publications are DISCLOSED; news reports are OSINT_SOURCED. Fee and carried-interest outcomes computed under section 6 are DERIVED and record their inputs.

4.3 Absence. LPAs are usually confidential, so public evidence of terms is often partial. A term that has not been seen is recorded as NOT DISCLOSED or UNKNOWN. It is never filled in from "market standard" or from an ILPA position.

5. Method

Each step records the term, the clause reference, and whether it matches, departs from or is not addressed by the ILPA reference in section 6.3.

5.1 Document set and precedence. Identify the LPA as amended, the side letters and MFN elections that apply to the LP in question, and the dates of each.

5.2 Timeline. Record first and final close, the investment period (start, end, suspension triggers), the term, and extension rights.

5.3 Management fee. Record rate and base for each period; step-down triggers; whether realisations and write-downs reduce the base after the step-down; whether a successor fund triggers a step-down; fees during extensions; discounts by close or commitment size. Compute the fee schedule over the fund's life (6.2).

5.4 Fee income and offsets. List the categories of portfolio company fees the manager or its affiliates may receive; the offset percentage; any exempt categories; fees for services by affiliates; and what happens to offsets that exceed the fee due (carried forward, rebated or lost).

5.5 Expenses. Record which costs the fund bears and which the manager bears; any cap on organisational expenses; treatment of placement fees and broken-deal expenses; allocation of expenses to co-investors.

5.6 Carried interest. Record the rate; whether it is calculated on net profits after fund expenses; treatment of taxes imposed on the fund; whether current income distributions carry; treatment of recapitalisations.

5.7 Waterfall. Record the type. For a deal-by-deal waterfall, record what is returned before carry on each realisation: the realised investment's cost only, or also write-downs of unrealised investments and allocable fees and expenses; whether unrealised investments are valued at the lower of cost or market for the test; and whether losses carry forward.

5.8 Preferred return and catch-up. Record the rate, compounding, when accrual starts (the capital call date, or the date a subscription facility was drawn for the investment) and when it stops; whether the hurdle is hard or followed by a catch-up; and the catch-up share.

5.9 Clawback and security. Record the test dates (end of term; interim tests and their triggers); whether the amount is gross or net of taxes paid by GP members; the guarantee (joint and several, several, parent company); escrow percentage and release tests; the clawback period; and the LP giveback cap and time limit.

5.10 GP commitment. Record the amount; the form (cash, fee waiver, financed); whether it is invested through the fund pro rata; restrictions on transfer of GP interests; notice of changes in ownership of the management company.

5.11 Governance. Record the LPAC's mandate, composition, voting and consent matters; the key persons, time-and-attention standard, trigger and cure process; the definition of cause, the removal vote and its consequences for carry and fees; the no-fault votes and consequences; consent rights over a change of control of the GP; and the extension process.

5.12 Leverage interactions. Record limits on subscription facilities (size, how long draws may remain outstanding, permitted uses, LP opt-out) and their treatment in the fee base and preferred return. Record whether a NAV facility may be used and whether LPAC consent is required, particularly where proceeds would fund distributions.

5.13 Recycling. Record the cap or monitoring threshold and when recycling rights expire.

5.14 Model the economics. Compute fees over the fund's life and the GP's carried interest under at least two return scenarios with the rules in 6.2. ILPA Principles 3.0 recommend that GPs provide prospective LPs with a model of how fees, expenses and carried interest will be calculated over the life of the fund (pp. 11–12); where one is provided, reconcile it with the LPA.

5.15 Compare and record. Compare each term with section 6.3 and record departures with the clause reference. Do not combine the results into a single alignment score.

6. Classification and calculation rules

6.1 Waterfall types.

LPAs combine these features in many ways. The record states the actual mechanics, not only the label.

6.2 Calculation rules. Notation: C contributed capital; t years from contribution to distribution; h preferred return rate; c carry rate; k catch-up share.

These rules simplify. Real waterfalls run on dated cash flows, multiple contributions and the LPA's own definitions; a model built on the rules above is an approximation and is labelled as one.

6.3 ILPA reference positions. Principles 3.0 page numbers refer to the June 2019 PDF. Model LPA positions are from ILPA's overview of the Whole of Fund version, including its July 2020 updates, except where marked DbD.

7. Conflict handling

1. Binding over descriptive. For any LP, the executed LPA as amended governs, as modified by that LP's side letter and MFN elections. A placement memorandum, term sheet or third-party summary that differs is recorded as a separate claim from its own source; it does not change the recorded term.
2. Different LPs, different terms. Fee discounts or other rights granted by side letter make terms differ between LPs. That is not a conflict. The fund-level term and each LP-specific term are recorded separately.
3. Amendments. An amendment creates a new version of the term with its effective date. Earlier versions are kept.
4. Two summaries disagree. Both are recorded with their sources and the term is marked CONFLICTING until an executed document is seen.
5. "Market standard". A statement that a term is "standard" or "typical" is not evidence of the fund's term and is not recorded as one.

8. Confidence and limitations

• Public evidence about LPA terms is incomplete, because LPAs are usually confidential. A term recorded from a summary may omit qualifications the LPA contains.
• The calculation rules in 6.2 assume one contribution and one distribution, annual compounding and no expenses. They illustrate the mechanics; they do not reproduce a particular LPA.
• Alignment has several dimensions (fee level and base, carry design, clawback security, GP capital at risk, governance rights) that do not reduce to one number. This framework does not produce an alignment score.
• Academic studies show why the fixed component of GP pay matters. Metrick and Yasuda (2010), modelling 238 funds raised between 1993 and 2006, estimated that about two-thirds of expected GP revenue came from fixed components, mainly management fees, that do not depend on performance. Sorensen, Wang and Yang (2014) model management fees, carried interest and illiquidity as substantial costs to LPs. Both describe their samples and models, not today's funds.
• Interpreting LPA language is a legal question. This framework records what a clause says and how it compares with a reference; it does not interpret contested drafting.

9. Temporal rules

1. A term is valid from the effective date of the document that sets it: execution of the LPA, an amendment, or a side letter. Each version is kept.
2. Event-driven terms record the event and its date: a key person event, a step-down, an extension, a removal vote.
3. A fund's terms are compared with the ILPA edition current when the LPA was signed. Comparison with a later edition is recorded separately and labelled with that edition.
4. Reference editions. ILPA Principles 3.0: released 27 June 2019 (no later edition found as of 2026-10-01). ILPA Model LPA: Whole of Fund version released October 2019 and updated July 2020; Deal-by-Deal version released 22 July 2020. ILPA guidance on subscription lines: June 2020. ILPA guidance on NAV-based facilities: 25 July 2024. ILPA Reporting Template v2.0: released 21 January 2025, applying on a go-forward basis to funds still in their investment period during Q1 2026 or commencing operations on or after 1 January 2026.
5. Legal and tax rules are outside this framework. Who may be charged performance-based compensation, the tax treatment of carried interest and the regulation of private fund advisers depend on jurisdiction and change over time; they are not stated here. See qualified client and carried interest taxation.

10. Edge cases

• First-close and size discounts. Where granted by side letter, an MFN may extend them to other LPs, subject to its exclusions.
• Subsequent closes. ILPA Principles 3.0 recommend that LPs admitted after the initial close pay equalisation interest, credited pro rata to the investors in the initial close and not treated as a fund asset (p. 18). Where the LPA follows that recommendation, equalisation interest does not enter the waterfall as fund income.
• Fee waivers for the GP commitment. Where the GP commitment is funded by waiving fees, LP and GP cash at risk differ from the headline commitment. ILPA Principles 3.0 recommend that the GP commitment be contributed in cash rather than through fee waivers (p. 17).
• Co-investment. The ILPA Model LPA provides that a co-investor bears its pro rata share of the fees, expenses and liabilities of the portfolio investment. See co-investment.
• Offsets larger than the fee. The net fee floors at zero; the LPA decides whether the excess is carried forward, rebated or lost.
• Current income. Where the LPA charges carry on current income distributions, the GP can receive carry before the fund's capital is returned. ILPA recommends against it (p. 10).
• Recapitalisations. Carry on a dividend recapitalisation before the investment's full cost is realised accelerates GP economics; ILPA recommends waiting for full realisation of invested capital (p. 10).
• Successor funds. ILPA recommends that key persons not act as GP of a separate fund managed by the same firm with substantially equivalent objectives until the investment period ends or the fund is invested, expended, committed or reserved for investments and expenses (p. 19), and that the management fee step down significantly when a follow-on fund is formed (p. 12). The record states whether the LPA provides either.
• Clawback net of tax. The GP's repayment is reduced by taxes paid on the carry. ILPA recommends gross clawbacks and, where net, the use of actual marginal rates and allowance for the preferred return (p. 11).
• Subscription facilities and the preferred return. If the preferred return accrues only from the LP call date, a facility shortens the accrual period and lowers the hurdle the GP must clear. ILPA recommends accrual from the facility draw date (p. 10).
• NAV facilities. ILPA's 2024 guidance, which covers private equity funds, recommends LPAC consent before a facility is put in place where the LPA is silent, and whenever proceeds will fund distributions. See NAV lending.
• Defaults and excuse rights. Defaulting LP remedies and excuse and exclusion rights change which LPs bear an investment and are recorded with the economics.

11. Worked examples

All amounts are illustrative, in USD millions. Each figure can be reproduced from the data given and the rules in 6.2.

Example 1: whole-fund waterfall. LPs contribute 100 at the start. The fund distributes 180 at the end of year 5. Preferred return 8% a year, compounded annually; carried interest 20%; full (100%) catch-up.

The GP receives 16.00, which is 20.0% of the 80 profit.

A partial catch-up changes how quickly the GP reaches its full share, not the end result, once profits are large enough. A hard hurdle changes the end result. When profits are small, the catch-up is incomplete and the GP's share stays below the headline carry rate.

Example 2: deal-by-deal against whole-fund. Investment A costs 50 and is sold for 130 in year 3. Investment B costs 50 and is sold for 30 in year 4. Carry 20%, preferred return 8% compounded annually, full catch-up. The deal-by-deal waterfall has no make-up of losses.

• Deal by deal: A's own preferred return is 50 × (1.08³ − 1) = 12.99. Its profit of 80 is above 12.99 / 0.8 = 16.23, so the catch-up completes and the GP takes 20% × 80 = 16.00 in year 3. B loses 20 and pays no carry.
• Whole fund: total profit is 60. Even if all 100 accrued the preferred return to year 4, the hurdle would be 100 × (1.08⁴ − 1) = 36.05, and 60 is above 36.05 / 0.8 = 45.06, so the catch-up completes and the GP's entitlement is 20% × 60 = 12.00.
• Clawback exposure: 16.00 − 12.00 = 4.00. An escrow of 30% of carry distributions, the level ILPA suggests, would hold 0.30 × 16.00 = 4.80, enough to cover it.

The same final split is reached either way only if the clawback is paid. Under the whole-fund waterfall, the GP receives nothing until LPs have recovered all 100 and their preferred return.

Example 3: management fee over the fund's life. Commitments 500. 2.0% of commitments for a five-year investment period: 10.0 a year, 50.0 in total. Then 1.5% of unrealised cost, which falls as investments are sold: 400, 340, 260, 180 and 100 in years 6 to 10, giving fees of 6.0, 5.1, 3.9, 2.7 and 1.5, or 19.2 in total. Total fees over ten years: 69.2, or 13.8% of commitments. Without the step-down (2.0% of commitments for ten years) the total would be 100.0, or 20.0%.

Example 4: fee offset. The annual management fee is 10.0. The manager's affiliates receive 3.0 of monitoring and transaction fees from portfolio companies. With a 100% offset the net fee is 7.0; with an 80% offset it is 7.6, and the manager keeps 0.6 of the portfolio company fees. If portfolio company fees were 12.0, a 100% offset would reduce the net fee to 0, and the LPA would decide what happens to the unapplied 2.0.

12. External references

13. Version and change log

• Version 1.0.0 (2026-10-01). First publication. Review method for fund economics and governance, waterfall and fee calculation rules with worked examples, and a mapping to ILPA Principles 3.0 and the ILPA Model LPA.
• Version 1.1.0 (2026-10-01). Independent review. Calculation rules in 6.2 now apply the catch-up in three zones (no carry up to the preferred return, all further profit to the GP until it holds its carry share, then the carry split) for both whole-fund and deal-by-deal waterfalls; the former rules paid the full carry rate as soon as the preferred return was cleared. Worked examples unchanged in their figures, with Example 2's reasoning stated in full. US legal and tax specifics moved out to linked concepts. ILPA paraphrases tightened (GP commitment, removal, successor funds, equalisation); Reporting Template offset reconciliation dated correctly.

Change control. A new ILPA edition, or a change to the calculation rules in 6.2, is a major change. Corrections to page references, new examples and clarifications are minor changes.

Concepts used

• Limited Partnership Agreement
• Side Letter
• Most Favored Nation Clause
• Management Fee
• Management Fee Offset
• Portfolio Company Fees
• Fund Expenses
• Carried Interest
• Distribution Waterfall
• European (Whole-Fund) Waterfall
• American (Deal-by-Deal) Waterfall
• Preferred Return (Pref)
• Hurdle Rate
• GP Catch-Up
• GP Clawback
• Carry Escrow
• LP Giveback
• GP Commitment
• Management Fee Waiver
• Limited Partner Advisory Committee
• Key Person Clause
• GP Removal for Cause
• No-Fault Divorce
• Fund Term Extension
• Alignment of Interests
• ILPA Principles
• ILPA Model LPA

Sources

1. ILPA Principles 3.0: Fostering Transparency, Governance and Alignment of Interests for General and Limited Partners. Institutional Limited Partners Association, ILPA, Third edition, released 27 June 2019. Status: Current edition (no 4.0 found as of 2026-10-01) (checked 2026-10-01). GP and Fund Economics pp. 10-13; Fund Term and Structure pp. 17-18; Key Person and GP Removal pp. 19-20; Fund Governance (LPAC) pp. 27-29; Subscription Lines p. 35; Glossary pp. 41-42
2. ILPA Model Limited Partnership Agreement (Whole of Fund and Deal-by-Deal versions). Institutional Limited Partners Association, ILPA, Whole of Fund first released October 2019, updated July 2020; Deal-by-Deal version and term sheet released 22 July 2020. Status: Current (checked 2026-10-01). Whole of Fund overview PDF pp. 2-4 (Key Terms; July 2020 updates, Sections 1.1, 8.3.2.2, 10.2, 10.4, 14.7.2, 14.7.3); Deal-by-Deal key fact
3. ILPA Reporting Template (v. 2.0). Institutional Limited Partners Association, ILPA, v2.0 released 21 January 2025 under the Quarterly Reporting Standards Initiative (QRSI). Status: Current; ILPA recommends implementation from Q1 2026 (checked 2026-10-01). Suggested Guidance pp. 9, 19-21
4. ILPA Reporting Template (2016) and Reporting Template Guidance v1.1. Institutional Limited Partners Association, ILPA, Version 1.0 January 2016 (part of the Fee Transparency Initiative); guidance v1.1 October 2016. Status: Superseded for new reporting by Reporting Template v2.0 (Jan 2025) (checked 2026-10-01). Sections A and B
5. Enhancing Transparency Around Subscription Lines of Credit. Institutional Limited Partners Association, ILPA, June 2020 (follows the June 2017 guidance Subscription Lines of Credit and Alignment of Interests). Status: Current (checked 2026-10-01). Recommended disclosures
6. NAV-Based Facilities: Guidance for LPs and GPs. Institutional Limited Partners Association, ILPA, Published 25 July 2024. Status: Current (checked 2026-10-01). Recommendations
7. The Economics of Private Equity Funds. Andrew Metrick; Ayako Yasuda, The Review of Financial Studies, Vol. 23(6), pp. 2303-2341. Status: Published (paywalled) (checked 2026-10-01). Abstract
8. Valuing Private Equity. Morten Sorensen; Neng Wang; Jinqiang Yang, The Review of Financial Studies, NBER Working Paper 19612 (November 2013); published Review of Financial Studies 27(7):1977-2021 (2014). Status: Published (checked 2026-10-01). Abstract (NBER Working Paper 19612)