Have you correctly calculated undrawn commitments for LPs with fee discounts and investment opt-outs?

Imagine your fund has held several closings. Most investors pay the standard management fee, but a number have negotiated discounted fees through side-letters. At the same time, certain LPs have exercised opt-out rights on specific investments.

When an investor opts out of an investment, their capital contributions are naturally lower, leaving them with proportionately higher undrawn commitments than other investors.

Many funds deal with this by allocating investment drawdowns based on each LP’s remaining undrawn commitment. Over time, this allows opt-out investors to participate more heavily in
subsequent investments, ensuring that substantially all investable commitments are ultimately utilised.

This issue is best addressed before the fund is launched. If the commercial intention was for investment allocations not to be affected by differences in management fees, careful LPA drafting can incorporate a deemed management fee concept. Under this approach, calculations of undrawn commitments and related allocation mechanics assume that all investors have paid the standard management fee, regardless of any contractual discount.

The discounted investor continues to enjoy the agreed economic benefit of paying lower management fees, while investment allocations remain aligned with the manager’s intended allocation methodology. Those allocations change only as a result of the more substantial differences caused by investment opt-outs. It’s a relatively straightforward drafting point, but one that can avoid unnecessary complexity and preserve fairness across the investor base.

These issues rarely arise from incorrect calculations. More often, they occur because the fund documentation doesn’t fully anticipate how different provisions interact. Side letters, fee discounts, opt-out rights and allocation mechanics should all be considered together during the drafting process. A well-drafted documentary suite, combined with an administrator that understands the economic intent behind the fund documents, helps ensure that calculations reflect what the parties actually intended.

An often unintended complication arises when management fee discounts are introduced. LPs benefiting from reduced management fees make marginally smaller capital calls because less is being drawn for fees. As a result, their undrawn commitments remain slightly higher than those of investors paying the standard fee. If investment allocations are calculated using undrawn commitments, those discounted investors may receive slightly larger allocations simply because they have paid less in management fees.

If investment allocations are calculated using undrawn commitments, those discounted investors may receive slightly larger allocations simply because they have paid less in management fees.

The differences may be small on any individual call, but t means that every investment has a marginally different investment allocation. This may not have been the commercial intention.

At Seneschal, we believe fund administration starts long before the first capital call. We work with fund managers and their legal advisers to review both draft and executed fund documentation, helping to identify areas where the interaction between LPAs, side letters and allocation provisions could produce unintended outcomes. We model real-world scenarios, including multiple closings, management fee discounts, investor opt-outs and varying capital call methodologies, to demonstrate how the mechanics will operate in practice.

By identifying these issues early, managers can refine their documentary suite before launch, reducing operational complexity, avoiding future disputes and ensuring the administration of the fund accurately reflects the commercial intentions of both the manager and its investors.