What are organizational expenses?

ILPA’s Principles say formation costs should be reasonable and capped at an amount suited to the fund’s size, that any excess over the cap should be offset against the management fee, and that the cap should allow for the cost of negotiating side letters. Costs specific to a parallel, alternative or co-investment vehicle should be borne by that vehicle, and expenses charged to the fund should be disclosed to LPs.

Say an LPA caps organizational expenses at $2 million and setting up the fund costs $2.5 million. Under an offset of the kind ILPA describes, the $500,000 excess reduces the management fee, so LPs bear $2 million. Simple example. Terms vary by fund.

They come out of LPs’ capital before any investing starts, and the cap decides how much of the set-up bill LPs pay.