A private investment fund is a set of negotiated relationships expressed in four or five documents.
Structure. A limited partnership or limited liability company for the fund, a management entity receiving the fee, and a general partner or managing member entity receiving carried interest — separated for liability and tax reasons.
Economics. A management fee on committed capital during the investment period and on invested capital thereafter; carried interest above a preferred return; and a distribution waterfall, either deal-by-deal with a clawback or whole-fund European style, which is the term investors examine most closely.
Capital calls and defaults. Notice periods, and remedies for a defaulting investor ranging from interest to forfeiture of a portion of the interest.
Investment restrictions. Concentration limits, geography, stage, follow-on reserves and borrowing limits.
Governance. An advisory committee of investors for conflicts, valuation and extensions; key person provisions suspending the investment period; and removal provisions for cause and, in some funds, without cause on a supermajority vote.
Term and extensions. A defined life with extension options requiring consent.
Side letters granting particular investors additional rights, with most favoured nation provisions.