What is a defaulting LP?

Delaware’s limited partnership law lets the agreement set the consequences. It lists, among others, reducing or eliminating the defaulting partner’s interest, subordinating it to other partners, forcing a sale, forfeiture, having other partners lend the unpaid amount, and redeeming or selling the interest at a value fixed by appraisal or formula. ILPA’s Principles list LP defaults among the matters an LPAC should review.

Say an LP with a $20 million commitment misses a $2 million call, and the LPA lets the GP cut a defaulter’s capital account by 50%. If its account stood at $8 million, it would fall to $4 million. Simple example. Terms vary by fund.

A default leaves a hole in a deal’s funding, and the penalties are what make LP commitments dependable for GPs and for lenders to the fund.