Legal Documentation and Negotiation – Investor Perspective

1The documents

If the documents conflict, the contribution agreement and trust deed usually govern the legal relationship, while the PPM is the disclosure. Investors should check that what the PPM describes is actually in the binding documents.

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2Economic terms

• Management fee: rate, basis (commitments or invested capital), step-downs after the investment period, and offsets of transaction or monitoring fees.
• Hurdle, carry and catch-up.
• Waterfall: whole-fund (European) or deal-by-deal (American).
• Clawback, with security such as an escrow of part of the carry, or personal guarantees from carry recipients.
• Expenses: what the fund bears (deal costs, legal, audit, valuation) versus what the manager bears (its own overheads), and caps on set-up costs.
• Recycling: whether proceeds from early exits can be reinvested.

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3Governance and protection terms

• Key person clause: suspends new investments if named people leave or stop devoting enough time.
• Removal of the manager: for cause (fraud, wilful default, breach) by a simple or modest majority, and without cause (no-fault) by a supermajority, often with compensation.
• Investor (LP) advisory committee: reviews conflicts, valuations and other matters.
• Conflicts of interest: rules on deals with affiliates, allocation between funds, and co-investment.
• Reporting and information rights: quarterly reports, audited accounts, valuation details.
• Tenure and extensions: extensions only with investor approval.
• Excuse and exclusion: an investor may be excused from a particular investment (for example, for legal, regulatory or ESG reasons), and the manager may exclude an investor where its participation would cause a legal or regulatory problem. SEBI requires these provisions to be disclosed in the PPM and applied as set out there.
• Standard of care and indemnity: the manager is indemnified except for gross negligence, fraud or wilful misconduct. Investors push for a narrow indemnity.

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4Investor obligations

• Meeting drawdowns within the notice period.
• Default remedies if they do not: interest on late payments, suspension of voting and distribution rights, forced sale of the interest at a discount, or forfeiture of part of it.
• Transfer restrictions: units can be transferred only with the manager's consent and within regulatory limits.
• Confidentiality of fund information.
• Giveback: in some funds, investors may be asked to return distributions to meet fund liabilities, within limits.

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5Side letters, MFN and negotiation

• Side letters give individual investors terms such as fee discounts, reporting, co-investment rights, excuse rights or advisory committee seats.
• A most-favoured-nation (MFN) clause lets an investor choose to receive terms given to other investors of a similar or smaller size, usually with exceptions.
• Negotiating power depends on size and timing: anchor investors and first-close investors often get fee discounts or other benefits. Smaller investors usually accept standard terms but benefit from terms negotiated by larger ones.
• Distributors should help clients understand the key terms but should not give legal advice; complex documents should be reviewed by the investor's legal adviser.

Remember

• Key person, removal, LPAC, excuse rights and clawback are core investor protections.
• Side letters and MFN spread negotiated terms; anchors and early investors get the best deals.

Practise this concept (5 questions)