Indemnification & Exculpation

Indemnification provisions require the fund (and ultimately LPs) to cover certain GP-related liabilities and expenses, while exculpation limits when the GP can be held liable for losses. These clauses establish the fund’s liability boundary — and strongly influence how risk is shared when things go wrong.

From an allocator perspective, this is not legal noise: it determines whether accountability exists for operational failures, conflicts, or preventable losses.

How allocators define indemnification/exculpation risk drivers

Allocators evaluate these clauses through:

• Liability standard: negligence vs gross negligence vs willful misconduct
• Carve-outs: fraud, bad faith, reckless disregard, material breach
• Advancement of expenses: whether legal costs are advanced before resolution
• Who is covered: GP entity, affiliates, officers, employees, advisors
• Conflict scenarios: related-party transactions and allocation disputes
• Insurance interaction: D&O/E&O coverage and limits
• Process safeguards: LPAC approvals for certain indemnified conflicts
• Transparency: reporting on claims, legal expenses, and governance responses

Allocator framing:
“When something breaks, who pays — and what behavior is actually accountable?”

Where these clauses matter most

• complex strategies with operational/legal risk (secondaries, structured credit)
• managers using many affiliates and service providers
• cross-vehicle allocation environments
• funds operating across multiple jurisdictions

How clause design changes outcomes

Strong accountability design:

• preserves protection for good-faith decisions while maintaining real carve-outs
• reduces moral hazard in operations and conflicts
• increases allocator comfort with governance risk

Weak accountability design:

• shifts broad liability to LPs
• makes enforcement difficult even in preventable failures
• increases allocator hesitation and legal diligence time

How allocators evaluate balance

Conviction increases when managers:

• maintain clear carve-outs and reasonable liability standards
• limit broad affiliate coverage without controls
• avoid automatic expense advancement in questionable conduct
• demonstrate insurance coverage and governance oversight

What slows allocator decision-making

• exculpation only pierced by extremely high standards with narrow carve-outs
• broad indemnification of affiliates with minimal oversight
• expense advancement without safeguards
• weak disclosure on legal expenses and claim history

Common misconceptions

• “Everyone has the same liability language.” → variations materially change LP risk.
• “Higher protection means better managers.” → accountability and discipline matter.
• “Insurance solves everything.” → coverage gaps and limits are real.

Key allocator questions during diligence

• What conduct standard triggers GP liability?
• Are legal expenses advanced before resolution? Under what conditions?
• How broad is affiliate coverage and oversight?
• What insurance is in place and what does it exclude?
• How are conflicts handled when indemnification is implicated?