What Fund Terms Matter Most When a Family Commits Capital?

Read the terms covering costs, responsibilities and rights, including what happens if the fund's plans change. The offering summary gives only part of the picture. Review the governing agreements to see how their provisions apply during the commitment.

Understand the Economics and Capital Obligations

Check management fees, carried interest, the preferred return or hurdle, catch-up mechanics and profit distributions. Review expenses charged to the fund, including organizational and administrative costs, audit and legal costs, financing charges and transaction costs. Ask whether fees are based on committed or invested capital and how they change after the investment period. Clarify when capital calls are made, how much notice you receive and what follows if you miss a call.

Ask how much discretion the manager has to recycle distributions, extend the investment period or call capital for expenses. Understand the fund's term and any extension rights. If the manager offers co-investment rights, confirm whether they are binding, how allocations are decided and what costs and fees apply. These rights may offer another way to invest alongside a fund. Review their terms carefully. For an overview of the economics to compare, see how to compare fees and carried interest.

Review Investment Authority and Alignment

Understand the fund's mandate, including its geographic and sector limits. Review concentration rules and borrowing authority. Check the ability to use derivatives or other structures. Ask whether the manager can change the strategy or invest in related-party transactions. Review key-person provisions and conflicts policies. Check removal rights and what happens if a principal leaves or the firm changes ownership.

Consider how the manager's interests align with investors. Ask how much capital the principals commit and how their compensation is linked to fund outcomes. Review terms that differ among investors and whether those differences could affect allocations or liquidity. If an opportunity comes through a special purpose vehicle or co-investment, understand who controls it and how its terms compare with the main fund.

Know Your Information and Liquidity Rights

Confirm which reports you will receive, how often, and what they cover. Reports may include financial statements and holdings. They may also describe valuation methods, fees, capital calls, distributions or material events. Review audit arrangements and any rights to inspect records. Ask how valuations are set for assets without regular market prices and how changes are explained.

Private funds often limit transfers and withdrawals. Understand lockups, redemption rights and gates. Review suspension provisions as well. Check any manager discretion to extend the fund or delay distributions. Consider whether expected liquidity fits the family's spending needs and other commitments. The terms governing lockups and withdrawal limits deserve particular attention.

Get the Documents Reviewed as a Complete Set

Read the subscription agreement, partnership agreement and offering memorandum together with side letters and related schedules. Look for conflicting definitions and broad discretion. Check for unclear expense treatment or terms that depend on another document. Keep a record of the provisions you rely on and the questions the manager answered. Ask your attorney to review the legal obligations and discuss tax consequences with your CPA. A careful review of the reporting and investor rights can clarify these protections before you commit.

By offering co-investment rights, a general partner can often persuade reticent investors to allocate to a fund.

Sources: The Single Family Office. Informational only, not financial, legal or tax advice.