Fund formation: The market terms benchmark

1. LPA drafting and market terms benchmarking

Every fund formation starts with an LPA, but there is no such thing as "standard terms". Market norms vary by fund size, strategy, vintage, and GP track record. The challenge: ensuring your terms are competitive without being LP-unfriendly.

What Omega does with uploaded peer LPAs:

• Extracts economic terms — management fees, carry %, hurdle rates, clawback provisions
• Compares governance rights — LP advisory committee powers, GP removal thresholds, investment restrictions
• Identifies outliers — provisions in your draft that are more GP-friendly or LP-friendly than market
• Flags fund-size dependencies — first-time funds get less favorable terms than established franchises
• Tracks vintage trends — market terms evolve (e.g., 2023-2024 saw increased LP fee transparency demands)

Example: Management fee structures across fund sizes

Uploading 15 peer LPAs from 2023-2024 vintage buyout funds, Omega identifies:

• $500M-$1B funds: 2.0% on committed capital during investment period, then 1.5% on invested capital (or NAV)
• $1B-$3B funds: 1.75% on committed capital, step-down to 1.25-1.5% on cost basis
• $3B+ mega-funds: 1.5% or lower, often with fee offsets for portfolio company fees

Insight: If you're raising a $750M fund and drafting 2.0% / 2.0% (no step-down), you're above market and will face LP pushback. Omega flags this before you send the draft to institutional LPs.

2. Side letter negotiation and MFN management

Side letters grant specific LPs economic concessions (fee discounts), enhanced transparency (expanded reporting), or governance rights (advisory committee seats). The risk: Most Favored Nation (MFN) clauses can force you to extend those terms to every LP who negotiates them.

Critical side letter provisions to track:

• Economic MFN — fee reductions, co-investment rights, carry tiers automatically extended to other LPs
• Governance MFN — transparency, reporting, consent rights (often carved out of MFN to avoid domino effect)
• Key person modifications — custom definitions, restart provisions after cures, different departure thresholds
• Excuse rights — ability to opt out of controversial investments (ESG, geographic, sector-based)
• Fee caps and offsets — limits on transaction/monitoring fees charged to portfolio companies

What Omega does:

Upload all negotiated side letters and Omega:

• Categorizes provisions — economic vs governance vs transparency
• Flags MFN triggers — which terms are subject to MFN? Which LPs have MFN rights?
• Models economic impact — if you grant a 25bps fee discount to an anchor LP with MFN, and 50% of LPs request it, what's the revenue impact?
• Identifies precedent — highlights terms you've granted before that create negotiation leverage for new LPs

Example: MFN cascade

An institutional LP negotiates a side letter reducing management fees from 2.0% to 1.75%. Three other LPs have economic MFN clauses. If they invoke MFN, your effective management fee drops from 2.0% to 1.75% on 40% of commitments — a material revenue reduction.

Omega calculates: Before you sign the side letter, Omega flags the MFN exposure and models the fee revenue impact under different LP opt-in scenarios.

3. Regulatory compliance and ILPA Principles alignment

Institutional LPs increasingly require alignment with ILPA Principles (transparency, governance, fee simplicity) and regulatory frameworks (AIFMD in Europe, Section 13F in the US). Non-compliance can disqualify entire LP categories.

What Omega checks against ILPA Principles 3.0:

• Fee transparency — clear disclosure of all fees (management, transaction, monitoring, broken deal)
• Alignment of interest — GP commitment levels, clawback escrows, key person provisions
• Governance — LP advisory committee structure, GP removal rights, conflict resolution
• Performance reporting — net IRR disclosure, benchmark comparisons, fee attribution
• Term flexibility — LP liquidity mechanisms (secondary transfers, GP-led continuation funds)

Example: ILPA non-compliance flag

A draft LPA includes a 1.5% management fee plus undisclosed transaction fees charged to portfolio companies. ILPA Principles require:

"All fees charged by the GP to the Fund or portfolio companies should be disclosed in the LPA, with clear offset or sharing provisions."

Omega flags: Transaction fee structure is not disclosed in the fee section, creating potential LP objections. Recommendation: Add a fee offset provision (e.g., 80% of transaction fees offset against management fees) to align with ILPA standards.

4. Fundraising document consistency and version control

Fund formation involves multiple interdependent documents — LPA, PPM, subscription agreements, DDQs — that must remain consistent as terms evolve during fundraising. Version mismatch between the PPM and final LPA is a common closing headache.

What Omega tracks across fundraising documents:

• Economic terms — do management fee rates in the PPM match the LPA?
• Investment strategy — sector focus, geography, deal size ranges consistent across docs?
• Key person definitions — same individuals listed in PPM and LPA?
• Defined terms — "Committed Capital," "Investment Period," "EBITDA" used consistently?
• Regulatory disclosures — conflicts of interest, affiliate transactions, valuation policies aligned?

Example: PPM/LPA mismatch

The PPM describes the fund as targeting "$500M to $750M" in commitments. The final LPA specifies a $1B hard cap (you over-fundraised). During LP onboarding, an investor flags the discrepancy — triggering a PPM amendment and re-signature for all prior LPs.

Omega prevents this: Cross-references fund size, fee terms, investment strategy across all documents and flags mismatches before first close.

The Omega workflow for fund formation

1. Upload peer LPAs for benchmarking — Omega extracts market terms by fund size/strategy
2. Draft LPA review — flags provisions above/below market, identifies LP negotiation risk
3. Side letter tracking — manages MFN exposure, models economic impact of concessions
4. ILPA compliance check — verifies alignment with institutional LP governance standards
5. Cross-document consistency — ensures PPM, LPA, DDQ, and sub docs remain in sync through fundraising

Time savings: Manual LPA drafting and peer benchmarking = 40-60 hours. Side letter negotiation tracking = 10-20 hours per close. With Omega: Initial benchmarking in 2-3 hours, ongoing side letter management automated.