Usually the remedy is whatever the LPA’s default provisions allow, but common options are:
- Best outcome: the defaulting LP sells their entire fund interest to a replacement buyer, subject to GP approval
- Alternative: reduce that LP’s effective commitment to the amount already funded, which also reduces future callable capital and typically management fees tied to that commitment
- Last resort: invoke the LPA default remedies, which may include penalties or a forced sale at a discount
Important:
- LPs should generally stay on the same capital call schedule
- Making special exceptions can create fiduciary issues
References:
- https://decilehub.com/base/1-general_questions/163681-what-happens-if-an-lp-fails-to-fund-a-capital-call
- https://decilehub.com/base/1-general_questions/21163-1-what-happens-to-the-overall-committed-capital-for-portfolio-companies-in-case-of-a-partial-or-complete-lp-default-how-can-gps-mitigate-the-risk-that-there-is-no-additional-capital-once-there-is-a-default-e-g-a-forced-sale-is-not-possible
- Best outcome: the defaulting LP sells their entire fund interest to a replacement buyer, subject to GP approval
- Alternative: reduce that LP’s effective commitment to the amount already funded, which also reduces future callable capital and typically management fees tied to that commitment
- Last resort: invoke the LPA default remedies, which may include penalties or a forced sale at a discount
Important:
- LPs should generally stay on the same capital call schedule
- Making special exceptions can create fiduciary issues
References:
- https://decilehub.com/base/1-general_questions/163681-what-happens-if-an-lp-fails-to-fund-a-capital-call
- https://decilehub.com/base/1-general_questions/21163-1-what-happens-to-the-overall-committed-capital-for-portfolio-companies-in-case-of-a-partial-or-complete-lp-default-how-can-gps-mitigate-the-risk-that-there-is-no-additional-capital-once-there-is-a-default-e-g-a-forced-sale-is-not-possible