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How to review LPAs and side letters with AI: the LPA provisions LPs negotiate, how MFN elections work, an MFN tracker you can copy, and the 2026 regulatory context.
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Fund formation has a rhythm. There are weeks of negotiating the limited partnership agreement, then a final close, then a wave of side letters, each one a small negotiation with its own exceptions and carve-outs. By the time the most-favored-nation compendium goes out, the hardest question on the deal team is remembering exactly what was promised to whom.
Fund documents work as a system. The LPA sets the baseline, each side letter changes it for one investor, and the MFN clause decides how far each change spreads.
The short answer: The best AI tool for reviewing investment fund documents applies your positions on economics, governance, and investor protections to the limited partnership agreement (LPA), lets you ask questions about a side letter alongside the LPA and related side letters, and returns redlines in Word. In Gavel Exec, you open the document you are negotiating, attach the related documents to the chat, run a fund documents playbook, and get tracked-change redlines with the reasoning for each change.
Many investors measure LPA terms against guidance from the Institutional Limited Partners Association (ILPA), including ILPA Principles 3.0 (2019) and the ILPA Model LPA, released in 2019 and revised in 2020.
LP positions are shown below. Managers usually negotiate toward more flexibility on each.
| Provision | What LPs check | Common issue |
|---|---|---|
| Management fee | Rate, basis after the investment period, and fee offsets | Fees on committed capital after the investment period, or offsets below 100% |
| Distribution waterfall | Whole-of-fund or deal-by-deal, preferred return, catch-up, carry | Deal-by-deal carry with a weak clawback |
| Clawback | Net or gross of taxes, and how it is secured | Net of taxes with no guarantee from carry recipients |
| Key person | Named individuals, time commitment, and consequences | No automatic suspension of the investment period |
| GP removal | Thresholds with and without cause | No-fault removal requiring a very high vote, or none at all |
| Fund expenses | Costs borne by the fund versus the manager | Broad definitions that shift manager overhead to the fund |
| Conflicts | Allocation, cross-fund deals, and advisory committee (LPAC) review | GP discretion over conflicts without LPAC review |
| Exculpation | Standard of conduct for the GP | Exculpation covering gross negligence |
A typical waterfall returns contributed capital, pays a preferred return commonly around 8 percent, gives the GP a catch-up, and then splits remaining profits, such as 80/20 (Ropes & Gray). ILPA favors a whole-of-fund waterfall (Torys). A key person event usually suspends the investment period until LPs vote to lift it, and ILPA recommends the suspension become permanent within 180 days unless a supermajority reinstates it (Goodwin). No-fault removal of the GP commonly requires 66⅔ to 80 percent of unaffiliated LP commitments, and removal for cause more often requires a majority.
Most side letters include an MFN clause that lets the investor elect terms granted to other investors (CMS). After closing, the manager circulates a compendium of terms. Investors elect within a set window. Rights are often tiered by commitment size, so an investor can elect only terms granted to investors with the same or smaller commitments. Common carve-outs exclude terms tied to an investor's legal, tax, or regulatory status, LPAC seats, and fee discounts reserved for large or early investors.
The fastest way to keep side letters consistent is to log each term as it is granted. The tracker below uses illustrative entries for a fund with three MFN tiers. A row that reads "Electable" is a term every investor in that tier or above may claim.
| Term granted | Investor and tier | Side letter section | MFN status | Interacts with |
|---|---|---|---|---|
| Quarterly reporting in the ILPA template | Public pension, Tier 1 ($100M+) | § 4.1 | Electable by Tier 1 | LPA § 9.2 reporting |
| Excuse right for fossil fuel investments | Endowment, Tier 2 ($25M to $100M) | § 3.2 | Carved out (investor policy) | LPA § 6.4 excuse procedure |
| LPAC seat | Public pension, Tier 1 | § 2.1 | Carved out (LPAC seats) | LPA § 11.1 LPAC composition |
| Management fee discount of 25 bps | First-close investor, Tier 1 | § 5.1 | Carved out (first-close discount) | LPA § 8.1 fees |
| Notice of key person event within 5 business days | Insurer, Tier 2 | § 4.3 | Electable by Tier 1 and Tier 2 | LPA § 7.3 key person |
| Regulatory capital reporting | Insurer, Tier 2 | § 4.4 | Carved out (regulatory status) | None |
Columns worth adding for a live deal: the date each term was granted, whether the investor elected it, and the partner who approved it.
The SEC's Private Fund Adviser Rules, including a preferential treatment rule for side letters, were vacated by the Fifth Circuit on June 5, 2024, and the SEC did not seek further review (Paul Hastings). Disclosure of preferential terms remains a market and fiduciary practice issue. ILPA's updated Reporting Template applies beginning with 2026 reporting, and its Performance Template applies to funds that begin operations on or after January 1, 2026 (Paul Hastings). The compliance date for the 2024 Form PF amendments is now July 1, 2027 (Morrison Foerster).
Consider a fund formation associate on a manager-side team. The MFN compendium goes to investors on Friday, and an insurer that joined at the final close has just sent its own side letter markup.
She opens the insurer's markup in Word and attaches the LPA and the side letter for the fund's largest pension investor to the chat, since that letter holds the LPAC consent rights. She asks whether anything in the insurer's markup conflicts with the LPA or the pension letter. The answer points to two issues: the insurer's excuse right would let it skip investments that the pension's LPAC consent right assumes every investor joins, and a new quarterly reporting term is drafted broadly enough to become electable by every Tier 2 investor. She adds both rows to the MFN tracker and flags them for the partner with links to the exact clauses.
The partner narrows the reporting term to the insurer's regulatory requirements, which takes it out of the MFN, and resolves the excuse right with a one-sentence carve-out. The compendium goes out on Thursday.
A large fund can close with 40 or more side letters, and the MFN compendium depends on every one of them. Fund formation teams increasingly want AI that reads the full set together and answers questions like "which side letters grant excuse rights that interact with the LPAC provisions?" in one pass. Until then, a tracker like the one above, combined with targeted questions about the two or three letters that touch the same provision, catches most conflicts before the compendium goes out.
Open the LPA or side letter in Word, attach the related documents to the chat, and run a fund documents playbook with LP-side or manager-side rules, such as "a key person event automatically suspends the investment period" or "the management fee steps down to invested capital after the investment period." Each finding links to the language it relies on, and each proposed redline shows a priority level and its reasoning. Teams can generate a playbook from their own guidelines, including ILPA-based positions, with AI Playbooks. Gavel Exec is SOC 2 Type II certified, and Gavel has zero data retention agreements with its large language model (LLM) providers.
Related reading: AI contract review for private equity firms and why manual review misses recurring risk across agreements.
For lawyers who negotiate LPAs and side letters in Microsoft Word, a Word-native tool such as Gavel Exec applies a fund documents playbook, answers questions about related documents attached to the chat, and proposes tracked-change redlines. Fund administration platforms suit teams whose priority is managing investor data and capital activity after closing.
An MFN clause lets an investor elect terms granted to other investors, usually within an election period after closing, limited to investors with the same or smaller commitments, and subject to carve-outs for investor-specific regulatory or tax terms.
A provision naming the investment professionals who must stay involved. If enough of them leave, the investment period is typically suspended until LPs vote to reinstate it.
Return of contributed capital, a preferred return commonly around 8 percent, a GP catch-up, and then a split of remaining profits, such as 80 percent to LPs and 20 percent to the GP.
No. The Fifth Circuit vacated the Private Fund Adviser Rules, including the preferential treatment rule, on June 5, 2024, and the SEC did not seek further review.
This article provides general information and is not legal advice.
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