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[Reviewing GP-LP Agreement Structures When Investing in PEF] 6 Things Practitioners Must Not Miss

Article posted in 2025-04-18 14:12:26 | VEAT

Law firm Veat received a request from a KOSDAQ-listed company (hereinafter “client”), and reviewed investment contracts and related documents in the process of the client participating as an LP (Limited Partner, general partner) in a U.S. private equity fund (Private Equity Fund, hereinafter ‘PEF’), analyzed key points of consideration from the LP’s perspective, and provided advice.

​Private equity funds are an alternative investment method that seeks profits primarily through investments in unlisted companies and are actively utilized among various companies and investors domestically and internationally. In particular, the structure of participating as an LP in a fund established by a GP (General Partner, investment management company) is also gaining popularity as a strategic investment tool for institutional investors and listed companies.

​However, private equity funds fundamentally differ from typical financial products in their structure and operation. Investors have only limited authority within the structure led by the GP, so it is very important to accurately understand and judge the substantive content contained in the contract and investment documents.

​Law firm Veat, from this perspective, pointed out the key elements that the client must review before participating as an LP, reviewed investment prospectuses (Private Placement Memorandum), subscription application forms, and other investment-related documents provided by the fund, and summarized the main contents and provided guidance.

 

Key content of the contract that LPs must confirm before investing

 

  • GP's authority and discretionary scope 
An important aspect of private equity fund contracts is what authority the GP has. Generally, the GP can independently perform most decisions, from selecting investment targets to selling assets and operating the fund. LPs must confirm whether items that they can agree to or express opinions on beforehand are included in the contract.

  • Understanding of capital call structure 
Most funds adopt a ‘capital call’ structure, where only a portion is paid at the time of contract signing, and the remaining balance is paid in several installments upon the GP's request. The timing of the call, conditions for the occurrence of the payment obligation, and provisions for penalties in the event of non-payment must be carefully examined in the contract.

  • Understanding of profit distribution structure
It is important to analyze how profits are distributed through a waterfall structure. You need to understand how profits are distributed between the GP and the LP at what ratio after recovering the principal, and how the conditions for carried interest are determined to determine the actual rate of return.

 

Especially, clauses that require attention in the investment contract

 

  • Confirmation of GP's unilateral right to change the contract
Some contracts include clauses that allow the GP to change the investment conditions without prior notice. This can reduce predictability from the LP’s perspective, and it is necessary to confirm whether control measures are in place.

  • LP’s scope of loss sharing
In principle, LPs are only responsible for losses within the limit of their contributions, but there may also be structures that require additional payments or loss compensation. You need to clearly understand the limits of loss burden and exceptional clauses.

  • Access to information 
It is very important whether LPs can regularly receive notifications from the GP regarding investment details and fund operation status. While the GP should provide the GP’s operating details and investment status to the LP at regular intervals, if the scope of specific information or the method of provision is limited, the LP will find it difficult to adequately understand the contents of the investment. Especially, listed companies and institutional LPs may require more detailed information to meet internal audit and disclosure requirements.

Private equity funds have a structurally large information asymmetry, and there are also cases where clauses that are disadvantageous to the LP may exist in the contract. Therefore, it is advisable to have a lawyer with expertise in practice receive advice in advance on what key contractual elements the LP must confirm and what practical considerations there are.

Law firm Veat has provided advice to various investors, including startups, listed companies, and financial institutions, on private equity funds. In particular, with an understanding of the GP-LP structure and practical experience, we provide a wide range of investment legal advice, including investment contract analysis, investment structure design, risk diagnosis and transaction execution.

This investment advisory capability of Law firm Veat has also been recognized through external evaluations. In the Bloomberg M&A league table announced in the first quarter of 2025, Law firm Veat ranked 9th in Korea in terms of the number of deals, standing out among major law firms despite intense competition. This is the result of a capability that goes beyond simple contract review and includes designing the client's service structure and providing practical negotiation support.

If you want to clearly understand the rights and obligations of investors within a complex private equity fund contract structure and check for potential risks in advance, Law firm Veat will be the optimal partner to assist you.

If you need private equity fund or other investment-related legal advice, please feel free to contact Law firm Veat.

This case study can also be viewed on the Law firm Veat blog below.

- [6 things to check with GP-LP contract when investing in PEF] What practical staff must not miss

Thank you.

Law firm Veat

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