Key points
- Four documents make up the core of a private fund offering: the limited partnership agreement (LPA), the private placement memorandum (PPM), the subscription documents and side letters.
- The LPA is the governing contract. The PPM is the disclosure document. The subscription agreement is how each investor commits. Side letters vary terms for individual LPs.
- Limited partners and their counsel focus on economics (fees, carry, waterfall), governance (key person, removal, LPAC) and transparency (reporting, valuation).
- Share drafts in stages: PPM and LPA summary to prospects, full LPA and subscription documents to investors in final diligence, side letters only to the investor they belong to.
- Keep every version in the data room with dates. LPs ask what changed between drafts.
Fund formation documents are the legal documents a general partner (GP) uses to set up a private investment fund and admit investors. For a typical US venture or private equity fund structured as a limited partnership, the core set is the limited partnership agreement, the private placement memorandum, the subscription documents and any side letters. Limited partners (LPs) review all of them in due diligence, and their lawyers negotiate the LPA and side letters line by line.
The four core documents
| Document | What it is | Who reads it closely | Negotiated? |
|---|---|---|---|
| Limited partnership agreement (LPA) | The contract governing the fund: economics, GP powers, LP rights, term | LP counsel, investment committee | Yes, especially with anchor LPs |
| Private placement memorandum (PPM) | Disclosure document: strategy, team, track record, risks, terms summary | LP investment team | Rarely, but questioned |
| Subscription agreement and questionnaire | Each LP’s commitment, plus investor eligibility and AML information | LP operations and compliance | Rarely |
| Side letter | Individual agreement varying or adding terms for one LP | That LP’s counsel | Yes |
Supporting documents usually include the GP and management company agreements, the investment adviser’s Form ADV (if registered), a due diligence questionnaire, audited financials of prior funds and valuation and compliance policies.
The limited partnership agreement
The LPA is the document that binds. When terms in the PPM and LPA differ, the LPA governs. Most of the negotiation happens here.
| LPA section | What LPs check |
|---|---|
| Management fee | Rate, basis (commitments in the investment period, then invested capital), step-downs, offsets for transaction fees |
| Carried interest and waterfall | Carry rate, hurdle, catch-up, whole-fund (European) or deal-by-deal (American) distribution |
| Clawback | GP obligation to return excess carry, escrow, guarantees |
| Investment period and term | Length, extensions and who approves them |
| Key person | Named individuals, what triggers suspension of investing |
| GP removal | For cause and without cause, votes required |
| LP advisory committee | Composition, conflicts it approves, valuation role |
| Investment limits | Concentration, geography, recycling, borrowing |
| Reporting | Quarterly and annual reports, audit, capital account statements |
| Transfers | Restrictions on LP transfers and GP consent |
Industry guidance helps here. The Institutional Limited Partners Association (ILPA) publishes Principles and a model LPA that many institutional investors use as a negotiating reference.
Change the hurdle and catch-up to see how a European and an American waterfall differ for the same fund result.
The private placement memorandum
The PPM tells the story and discloses the risks. It describes the strategy, the team, the track record, the terms in summary, conflicts of interest, tax and regulatory matters and a long list of risk factors. For a US fund relying on a private placement exemption, it is a key part of the disclosure that supports anti-fraud compliance.
LPs read the track record section most carefully and test it against the underlying data. Our guide to private equity track record due diligence covers what they check.
Subscription documents
The subscription agreement is how each investor commits capital. It is paired with an investor questionnaire that confirms eligibility (for example, accredited investor or qualified purchaser status in the US), collects tax forms and gathers the know-your-customer and anti-money laundering information the fund or its administrator needs.
These are rarely negotiated, but they are often filled in wrongly. Many funds now collect them electronically through the administrator’s portal.
Side letters
A side letter gives one LP terms that differ from the LPA: fee discounts, co-investment rights, extra reporting, excuse rights for certain investments, or an LPAC seat. A most favored nation (MFN) clause lets other LPs elect terms given to investors of the same or smaller size. Our side letters guide goes deeper.
The order LPs see documents
How fund documents reach a prospective LP
- 01First meeting
Deck and a short summary of terms.
- 02Interest
PPM and DDQ in the data room; track record backup on request.
- 03Diligence
Draft LPA, policies, prior fund financials; reference calls.
- 04Commitment
Final LPA, subscription documents, side letter negotiation.
- 05Closing
Executed documents, capital account opened, side letter MFN process.
A data room for a fund raise
Who sees which fund documents
| Folder | Prospect after first meeting | LP in diligence | Committed LP | Placement agent |
|---|---|---|---|---|
| Deck and terms summary | Download with watermark | Download with watermark | Download with watermark | Download with watermark |
| PPM | View only | View only | Download with watermark | View only |
| LPA draft | No access | View only | Download with watermark | View only |
| Track record detail | No access | View only | View only | View only |
| Subscription documents | No access | No access | Download with watermark | No access |
| Own side letter | No access | No access | View only | No access |
No accessView onlyDownload with watermarkFull
Checklist before the first close
- LPA final and consistent with the PPM terms summary.
- PPM risk factors and conflicts updated for the final strategy.
- Subscription documents tested with your administrator.
- Side letter terms logged in one tracker, with MFN eligibility by LP size.
- Policies (valuation, allocation, compliance) in the data room.
- Prior fund audits and quarterly reports uploaded.
- Access groups set so each LP sees only its own side letter and capital account.
The limited partners use case and the emerging managers use case show which data rooms handle per-LP permissions and long fundraises well.
What is the difference between an LPA and a PPM?
The LPA is the binding contract that governs the fund. The PPM is a disclosure document that describes the fund and its risks. If they conflict, the LPA usually controls.
Do all private funds need a PPM?
Not always. Many institutional funds use one; some small or first-time funds raising from a few sophisticated LPs use a detailed deck and terms summary. Counsel should advise based on the investors and the exemption relied on.
What is an MFN clause in a side letter?
A most favored nation clause lets an LP elect terms granted to other LPs of the same or smaller commitment size, usually with carve-outs for terms specific to certain investors.
Who drafts fund formation documents?
The GP's fund counsel drafts them. Anchor LPs and their counsel negotiate the LPA and side letters.
What is the ILPA model LPA?
A model limited partnership agreement published by the Institutional Limited Partners Association, reflecting LP-friendly terms. Many LPs use it as a reference in negotiations.
When do LPs see the subscription documents?
Usually once they have decided to commit, shortly before a closing.
