📕 AN INSTITUTIONAL HANDBOOK OF VC FUND INVESTING

Setting Up and Investing in Venture Capital Funds The Institutional Way — A Practical Handbook

By Reference Capital

1. INTRODUCTION

Institutional venture capital investing goes beyond raising capital from professional investors. It demands higher standard of governance, discipline, and accountability. Institutional Limited Partners (“LPs”) (e.g., pension funds, endowments, fund-of-funds, etc.) deploy capital under strict fiduciary and regulatory oversight. Their commitments require transparency, documented processes, and operational reliability from the General Partners (“GPs”) they back.

For GPs, aligning with these expectations is both a challenge and an opportunity. The challenge is to build the infrastructure (i.e., reporting, compliance, governance) that can withstand institutional scrutiny. The opportunity lies in what this unlocks: enduring partnerships, access to stable and scalable capital, and the credibility that comes with being recognized as an institutional-grade investment firm.

At Reference Capital, we invest in VC funds with the goal of raising industry standards through the way we select and partner with managers. We make sure our investors have the clarity and confidence they need to make informed decisions. Due diligence for us is the foundation of trust, not a box-ticking exercise. By examining legal, operational, and investment dimensions in depth, we seek managers who combine performance with transparency, discipline, and long-term alignment. We have always believed that the strength of any investment lies not only in the numbers, but also in the structure, governance, and discipline that support them. We ensure that every VC fund we evaluate meets the highest standards in governance, compliance, IT security, and operational resilience.

This handbook summarizes our approach. It explains the key areas we focus on and shares examples of how structure and governance have shaped real outcomes. It’s not a checklist or a legal manual, but a way to think about how institutional investors evaluate readiness, manage risk, and recognize GPs built to last. It’s meant as a practical guide for GPs preparing to meet institutional standards and for LPs benchmarking best practices. In sharing it, we hope to contribute to a more transparent and resilient venture ecosystem.

2. FUND ECOSYSTEM

A well-structured VC fund relies on a network of specialized service providers that together create its operational backbone. Each plays a distinct role in ensuring transparency, accuracy, and fiduciary integrity. When assessing a manager, we focus on both the quality of these counterparties and the robustness of the oversight mechanisms that connect them.

i) General Partner / Investment Manager / Investment Advisor

The General Partner sits at the center of governance. It holds fiduciary responsibility for the fund’s activities, oversees investment and operational decisions, and ensures that service providers perform their duties in line with fund documents and investor expectations. We look for independence, accountability, and a clear delegation of authority between the GP and the Investment Manager who drives portfolio strategy, sourcing, and decision-making on behalf of the fund. It is responsible for executing investments, monitoring performance, and maintaining compliance with the fund’s mandate. We assess whether investment authority and oversight are properly documented, and whether operational independence from other fund functions (finance, compliance, administration) is preserved.

ii) Fund Administrator

The fund administrator maintains the fund’s books, calculates NAV, prepares capital account statements and financial statements. It is also responsible for investor reporting and capital activity processing. Independence and reliability here are key: an established third-party administrator greatly enhances confidence in valuation integrity, accounting accuracy, and cash reconciliation. We look for administrators that provide audited internal control reports (SOC or ISAE 3402), maintain robust audit trails, operate modern accounting systems, and demonstrate responsiveness to both GPs and LPs

iii) Auditor

The external auditor provides independent verification of the fund’s financial statements and valuation methodologies. Their involvement ensures that the accounting treatment, asset pricing, and reporting processes adhere to applicable standards (e.g., IFRS, local GAAP). The quality of the audit firm, its experience with similar fund structures, and its independence from other service roles are all key elements to consider.

iv) Custodian

The custodian safeguards the fund’s assets, ensuring secure storage and accurate recordkeeping. In traditional VC funds, equity interests are not typically held through custodians but rather through[JE1] [AG2] company share registers, with banks handling capital movements and recordkeeping for ownership documentation. Custodians become relevant primarily for digital asset exposure or liquid instruments, where assets must be held under controlled, auditable arrangements such as MPC wallets or segregated custody accounts. Best practice is to maintain relationships with multiple custodians, particularly across asset types, to reduce operational and counterparty risk.

v) Bank

Banking partners manage the fund’s operating and capital accounts, handle subscription and distribution flows, and may provide credit facilities if needed. Concentration with a single bank poses material operational and liquidity risk — recent failures such as Silicon Valley Bank and Signature Bank demonstrated how quickly funds can lose access to capital and payment systems when banking exposure is not diversified. Best practice is to maintain relationships with at least two reputable banks, separating operational accounts from capital accounts to ensure continuity and reduce systemic dependency.

vi) Legal Counsel

Legal counsel advises on fund formation, regulatory compliance, and contractual matters, including side letters. They play a critical role in ensuring the fund’s structure, offering documents, and investor agreements align with both local regulations and LP expectations. We look for firms with demonstrable fund formation expertise and a clear mandate to act in the fund’s best interest.

vii) Tax Advisor

Tax advisor guides the fund on structuring, jurisdictional compliance, and filings. Their role is particularly important for structures across multiple jurisdictions where issues such as UBTI, ECI, or FATCA reporting may arise. Experienced tax advisor helps mitigate double taxation risks and ensures that LPs receive accurate and timely reporting. A strong tax advisor is not a formality but a core risk mitigant, ensuring the fund avoids costly missteps, prevents double taxation, and delivers accurate, timely investor reporting that underpins institutional trust and credibility.

3. FUND INFORMATION

i) Definition

Fund formation is one of the first and most critical steps in creating a VC vehicle. The structure you choose determines how capital can be raised, how returns are taxed, and how risks are shared between investors and managers. Misalignment at this stage can create operational inefficiencies, investor pushback, or even regulatory exposure down the line. Our general recommendation is to choose a structure that fits the investment mandate the manager wants to pursue. As per the below, here’s an example of a VC fund structure:

i) Tax

In general, LPs are acutely sensitive to cross-border tax risks that can erode returns or create unexpected compliance burdens. Diligence focuses on whether the GP has proactively identified these risks and implemented safeguards. Key areas that we address include:

• UBTI (Unrelated Business Taxable Income) — UBTI is income that tax-exempt investors (pensions, endowments, foundations) are not supposed to generate, often triggered when a fund invests through flow-through entities or uses leverage. If a fund generates UBTI, tax-exempt LPs lose their tax-advantaged status on that portion of income and may owe filings or taxes for U.S. tax purposes. Hence, clear structuring to avoid UBTI, such as blocker corporations where flow-through or leverage make exposure likely. If prior funds did generate UBTI, we want a clear explanation of source and mitigation and would like to understand if there is a risk that it happens again for new vintages.
• ECI (Effectively Connected Income) — ECI is income that is effectively connected with a U.S. trade or business, which can subject foreign investors to U.S. taxation. Often linked to flow-through vehicles. Foreign LPs avoid funds that inadvertently create ECI exposure, as it triggers U.S. filing obligations. Strong structuring to eliminate ECI exposure, use of blockers where relevant, and a record of no surprise tax filing for foreign investors.
• Blocker corporations — These are opaque entities, typically in a tax-neutral jurisdiction such as Cayman Islands or BVI, that “block” income from flowing directly to LPs, thus shielding them from UBTI or ECI. Blockers are the standard tool for protecting sensitive investors (tax-exempts, non-U.S. LPs).
• Cross-border investor tax filings definition — Cross-border investor tax filings arise when a fund’s structure forces LPs to submit tax returns in jurisdictions other than their home country. This is a material concern for institutional investors, who place a premium on clean, predictable structures. Being dragged into foreign compliance regimes as a result of a GP’s structuring choices adds cost, administrative burden, and reputational risk.
• FATCA & CRS — FATCA (Foreign Account Tax Compliance Act) and CRS (Common Reporting Standard) both require funds to identify, document, and report investor information to relevant tax authorities. FATCA applies to U.S. persons and entities, while CRS extends similar obligations globally across participating jurisdictions. For LPs, the key concern is assurance that the GP maintains robust systems for investor classification, data security, and timely reporting under both frameworks. We look for documented compliance procedures, GIIN registration where applicable, and evidence that these reporting processes are embedded in fund administration rather than handled ad hoc.

Tax treatment in digital assets requires its own focus because token income and classification issues arise far more often than in traditional portfolios. We concentrate on:

• Classification and reporting — Categorization of token income (ordinary income vs. capital gains) directly affects liability. Advisors with real digital asset expertise should be preparing the fund’s and investors’ filings.
• Regulatory engagement — Any local tax authority guidance, notices, or disputes should be disclosed, as they can indicate both the manager’s approach to compliance and the risk of future challenges. Digital asset tax treatment is still under progress so it’s important that each GP consults with local tax advisors.

4. LEGAL DUE DILIGENCE

Legal documentation forms the backbone of the relationship between GP and LP. It defines the rights, obligations, and protections of all parties, translating the fund’s governance and economic arrangements into enforceable terms. For LPs, this section provides the basis for assessing alignment, transparency, and structural soundness.

i) Fund Term

The fund term sets the life cycle of the investment vehicle, typically expressed as a fixed number of years (e.g., 10 years), often with optional extensions. It defines the window during which the GP can make investments , manage the portfolio, and liquidate holdings before winding up the fund. The term directly affects liquidity expectations, alignment of investor and manager incentives, and the overall pacing of capital deployment. Too short a term can pressure managers into premature exits; too long can tie up LP capital unnecessarily. The recommendation is to set a fund term that realistically matches the underlying strategy and the industry in which the fund operates. In VC, the market standard is a 10-year term plus two 1-year extensions at the GP’s discretion, with any further extensions requiring LPAC approval or majority in interest of LPs. This structure preserves flexibility for the GP while ensuring LP oversight and alignment.

ii) Distributions

Distributions define how and when cash or securities are returned to LPs once investments generate proceeds. Distribution mechanics determine the timing and fairness of investor returns. They directly influence risk-sharing between LPs and the GP: some structures let LPs recover their capital before the GP receives carried interest, while others allow the GP to take carried interest earlier.

A common feature of distribution waterfalls is the GP catch-up. This mechanism becomes relevant when a carry step-up applies (e.g., when the GP’s carried interest increases from 20% to 25% once a certain performance threshold is reached (e.g., 4x net)). In such cases, the catch-up allows the GP to retroactively earn the higher carry percentage on the prior gains that were previously distributed under the lower rate.

Practically, this means that subsequent distributions may be directed entirely to the GP until its overall share of profits is brought in line with the new carried interest level. While this structure rewards sustained outperformance, it also temporarily diverts proceeds to the GP, making it a key consideration when assessing the alignment and fairness of the fund’s waterfall.

Best practice is a European-style (fund-as-a-whole) distribution waterfall, where LPs first receive 100% of contributed before the GP collects carried interest. This structure is widely considered more LP-friendly and aligns the GP with long-term portfolio value creation. By contrast, American-style (deal-by-deal) waterfalls allow carried interest to be taken on early profitable exits, even if later investments underperform. While this approach is not inherently improper, it is generally viewed as less favorable to LPs unless it is coupled with robust clawback protections that ensure alignment over the life of the fund.

iii) Clawback

A clawback provision is one of the most consequential economic protections for LPs. Its purpose is straightforward: if the GP receives more carried interest than the fund’s final results justify, the excess must be repaid. This situation arises most often when early profitable exits distribute carried interest upfront, while later investments underperform and drag down the fund’s overall return. Without a functioning clawback, LPs can end up subsidizing GP profits even if the fund as a whole has lost money.

When we look at clawback language, we focus less on the headline concept and more on the mechanics. The first question is who bears the liability. Strong provisions bind not just the GP entity, which may be thinly capitalized, but also the individual partners who receive carried interest, on a joint-and-several basis. This ensures the obligation is real, not theoretical.

Second is timing. A clawback tested only at final liquidation, 10–12 years out, is far less effective than one with interim checkpoints — annually, or at least upon large distributions — so that imbalances don’t persist unchecked for a decade.

A third critical aspect is security for repayment. We prefer to see carried interest distributions either held in escrow or subject to a clear set-off right in the fund. This ensures that when the time comes to true up, repayment can actually be executed. GPs should also commit jointly to cover any excess carry paid, reinforcing accountability and the enforceability of the provision. Repayment should generally be made in cash, and if carry was paid in kind (e.g., equity or tokens), its value must be crystallized at the time of distribution. Tax treatment should be net of taxes actually paid, with an obligation on the GP to seek refunds or credits and return any benefit to LPs.

iv) LP Giveback

An LP giveback provision requires LPs to return a portion of distributions they have already received if the fund later needs to cover liabilities — most commonly indemnification claims or expenses that exceed reserves. It’s essentially a safety net ensuring the fund can meet its obligations even after capital has been returned.

We typically like to see LP giveback provisions that are limited in scope, capped, and time-bound. For instance, an LPA might state: “Each Limited Partner shall be required to return to the Partnership, if necessary, up to 25% of amounts distributed to such Limited Partner, provided that in no event shall the total giveback obligation exceed the amount of capital contributed by such Limited Partner. This obligation shall expire on the second anniversary of the dissolution of the Partnership.” This kind of language gives the GP a practical buffer to meet unforeseen liabilities while also giving LPs clarity on their maximum exposure and the timeframe during which they can be called back.

v) Capital Recalls & Reinvestment Rules

This section digs into what happens once the investment period has run its course. A well-drafted LPA should answer a handful of practical questions clearly:

• Can distributions be recalled for reinvestment?

During the investment period, recalls should be limited to new or follow-on investments. After the investment period, they should apply only to follow-ons necessary to protect or enhance existing portfolio positions. Recall rights should also be time limited. Once a distribution is made, the GP should not retain an indefinite ability to recall it. This ensures discipline in capital deployment and predictability for LPs regarding liquidity.

• If reinvestment is allowed, what does it cover and how does it affect capital commitments?

Recycling early proceeds can be efficient, but it works best when capped (e.g., up to 120% of total capital commitment) and time bound. Otherwise, LPs may feel like they signed up for an elastic capital commitment that never stops stretching.

• Are capital calls permitted after the investment period?

After the investment period closes, LPs expect no more new deals. The only acceptable uses for additional capital calls are expenses and follow-ons that protect existing investments. If the LPA allows the GP to keep calling capital for fresh portfolio companies after this point, it effectively makes the investment period meaningless and keeps LPs exposed longer than they certainly bargained for.

• Is there a limit on follow-on investments?

Reasonable LPAs allow follow-ons to protect earlier investments but prohibit them from becoming a backdoor way to expand the portfolio. We like to see clear guardrails here — for example, limiting follow-ons to a percentage of total capital commitment or restricting them to companies already in the portfolio.

Key takeaway: these mechanics are about predictability. LPs don’t want perpetual exposure or vague recall rights that let the GP extend the fund by stealth.

vi) Management Fee

The management fee compensates the GP/IM for the ongoing costs of running the fund (e.g., team salaries, office, compliance, reporting, and overhead). It is one of the most scrutinized LPA terms, because while fees should cover running costs, they also directly reduce net LP returns. Beyond just the percentage rate, the important details are when the fee accrues, on what base, and how it interacts with other economic streams the GP may receive. We typically pay close attention to the following points:

• Start and stop mechanics — The norm is for fees to begin at the initial closing (sometimes back-charged to cover pre-launch expenses), run through the investment period at 2% of total capital commitment, and then taper down at the end of the investment period — typically by 0.1% annually — until they reach a 1.5% floor. Fees should step down further at liquidation or after the term, so LPs aren’t paying for a dormant fund. If not the case, we typically like to see fees charged on committed capital during the investment period and then switch to invested capital (or remaining cost basis of unrealized investments) once the investment period ends.
• Waivers — Fee waivers can be applied under certain conditions (e.g., for a large LP) which pushes the GP to forgo management fees. In this case, we look for transparency on how waived amounts are tracked, and prefer they don’t create hidden economics for the GP.

vii) Offsets Against Management Fee

What matters most with “other fees” is allocation and limits. Organizational expenses — legal, fund setup, initial audit — should be capped, usually at around 0.5%-1% of total capital commitment or a set dollar figure, so LPs don’t underwrite an unlimited launch bill. What goes above cap should be offset against management fee.

Placement agent fees are best paid by the GP, since fundraising benefits them; if any portion is charged to the fund, it should reduce management fees dollar-for-dollar.

We also look carefully at income or fees received from portfolio companies by the GP or affiliates. If the GP or affiliates receive income from portfolio companies (e.g., management, transaction, or monitoring fees), we expect these to be offset against the management fee or otherwise credited back to the fund. Without this, LPs effectively pay twice.

Transparency is also essential: a schedule of expenses charged to active funds, disclosure of any new expense categories, and clarity around costs shifted from the GP to the fund due to outsourcing or restructuring. These ensure LPs can see exactly how their capital is being used and confirm that fund expenses are not being expanded beyond their intended scope.

viii) Fund Expenses

The critical distinction on fund expenses is who bears what. Compliance, regulatory, and fund administrator costs — audits, tax filings, fund administration, regulatory reporting, insurance — are standard fund charges and should sit with the fund. By contrast, overhead and employment costs (e.g., GP staff salaries, rent, office expenses, deal sourcing, etc.) should be paid by the GP out of the management fee.

ix) Removal Rights

Removal rights govern when and how LPs can remove the GP and what follows economically if that happens. They are a core part of the governance package and need to be drafted with clarity to avoid disputes. No-fault removal is the cleanest accountability tool. It allows LPs to remove the GP without alleging misconduct, typically requiring a supermajority vote over 75%-80%. We look for this option to exist, even if only at a high threshold, as it provides investors with a safety valve when the relationship simply no longer works.

For-cause removal should cover fraud, willful misconduct, gross negligence, or material breach of the LPA. We like to see cause defined broadly enough to catch real misconduct, and the voting threshold set at a level that is practical — usually a majority in interest of LPs. Post-removal mechanics should be spelled out to avoid ambiguity:

• Management fees — The GP should stop accruing fees immediately upon removal. We look for explicit language stating that any management fee entitlement ends on the effective date of removal, with no “tail” payments other than reimbursement of documented expenses incurred prior to removal.
• Carried interest economics — Unvested or prospective carried interest should be forfeited. The GP should retain only crystallized rights on realizations that occurred before removal. Distributions from unrealized investments made prior to removal should flow to the successor GP for the benefit of LPs, not to the removed GP.
• Conversion to LP — A removed GP often becomes a LP automatically, retaining rights as an investor only, not as manager. This ensures they still receive allocations and distributions tied to their own capital commitment, but no ongoing management or incentive compensation.
• Successor GP appointment — The LPA should require LPs to appoint a new GP within a fixed period (commonly 60–90 days). This prevents a governance vacuum and allows the fund to continue without dissolution.
• Capital obligations — Once removed, the GP should not be obliged to fund future capital calls. Its capital commitment should either be deemed fully funded or adjusted, with the successor GP taking over responsibility for any unfunded obligations.

x) Investment Period Termination

Investment period termination provisions govern how and when the GP’s ability to make new investments ends ahead of schedule. They are an essential check for LPs, ensuring that if confidence is lost or key people depart, the fund does not continue deploying capital unchecked.

As with GP removal, no-fault termination gives LPs a safety valve: by a supermajority vote of LPs, they can elect to end the investment period even without misconduct. This stops new blind-pool risk if the relationship with the GP has broken down. A central part of this is the Key Person clause, which should be carefully drafted:

• Trigger — A Key Person Event occurs if named individuals (e.g., founders or lead partners) cease devoting sufficient time to the fund, die, or are deemed incapacitated by a court.
• Result — Upon a Key Person Event, capital calls should be frozen, except for (i) follow-ons or investments approved by the LPAC, (ii) completing already-committed deals, and (iii) covering costs, expenses, management fees, and indemnification obligations.
• Replacement procedure — LPs may appoint a replacement GP within a fixed timeframe (often 60–90 days) by majority in interest of LPs, allowing the fund to continue without dissolution.

xi) Fund Termination

Fund termination addresses the ultimate dissolution of the fund. Unlike removal rights or investment period suspension, which keep the fund alive but under new conditions, termination ends the vehicle entirely and triggers liquidation. We look for three elements:

• No-fault termination — LPs should have a collective right to end the fund if they lose confidence in its viability. This is typically structured as a high-threshold vote, but the key is that the option exists.
• For-cause termination — For-cause termination covers breaches such as fraud, willful misconduct, gross negligence, or material breach of the LPA. In such case, LPs should have the ability, typically by majority in interest of LPs, to remove the GP’s authority to make new investments following such an event which leads to fund dissolution if the GP is not replaced.
• Liquidation mechanics — The GP should not have unilateral control over winding up. By default, the GP may act as liquidator, but LPs holding a majority in interest of LPs must be able to replace the GP with an independent liquidator if they see fit.

LPs should know under what circumstances the fund ceases, who handles the wind-down, and how their rights are protected during dissolution, without creating a governance vacuum or handing undue discretion to the GP.

xii) GP Commitment

GP commitment is the amount of capital the General Partner invests in the fund alongside the LPs, designed to align interests. We generally prefer to see the capital commitment funded personally by the GP and its affiliates, ensuring true risk-sharing. However, we recognize that for emerging managers, a portion of the capital commitment may come from management fee deferral or offset. In such cases, it should be transparent, documented, and structured to mirror the economics of a capital commitment in cash. The market standard is 2% of total capital commitment.

xiii) Admission of further Partners

Admission of further partners governs how new LPs can be brought into the fund after the initial closing. It is mainly a fairness question — ensuring early investors are not disadvantaged by later entrants. We typically look for:

• Timing — new LPs may typically be admitted during a defined fundraising window (often 6–18 months after first close). Beyond that, additional closings should be tightly limited.
• Equalization — later investors should “true up” by contributing capital as if they had been invested from the start. This usually means paying their share of prior capital calls plus an interest factor (e.g. prime rate + margin or a fixed rate) to compensate early LPs.

We do not support open-ended authority for the GP to admit new LPs once the final closing has occurred. The admission of investors should be strictly limited to the defined fundraising period, with any extensions requiring LPAC or LP approval. Similarly, equalization formulas must ensure that early investors are fully compensated for the time value of their capital. New LPs may join only on economic terms that maintain fairness and preserve the integrity of the fund’s structure.

xiv) Investment Terms

Investment terms set the guardrails for how the GP can deploy capital — essentially the rules of the mandate. They are critical to make sure the fund stays within its agreed strategy and that capital is not put at risk in ways LPs did not sign up for. A few examples of key investment terms include:

• Permitted investments — It clearly defined scope (e.g. venture equity, digital assets, secondary interests).
• Concentration limits — Caps on single investments (often 10–15% of total capital commitment) and on specific categories (e.g. geography, asset type) to prevent overexposure.
• Follow-ons vs. new deals — Language should clarify how much capital can be reserved for follow-on investments and under what conditions.
• Prohibited investments — Exclusion lists matter (e.g., guns, pornography, etc.).
• Co-investment — If allowed, mechanics must ensure pro rata treatment and no cherry-picking in favor of affiliates or select LPs.

What we don’t like are vague definitions of permitted investments, absence of diversification limits, or unchecked borrowing authority. Good drafting gives the GP enough flexibility to execute the strategy while keeping LP risk within agreed boundaries.

xv) Debt

Debt provisions govern the fund’s ability to borrow, and while limited use can smooth operations, broad authority can create hidden risks. The most common and acceptable form is a subscription line of credit — short-term borrowing against LP capital commitments to bridge capital calls — usually capped at around 15–20% of total capital commitment and repaid within 6–12 months. Borrowing should serve working capital or liquidity management, not become a structural source of leverage. In case of using leverage, it should be limited and tightly defined. We look for explicit limits on both amount and duration, plus regular reporting on outstanding balances and costs.

xvi) Indemnity / Exculpation

These provisions set the boundaries of the GP’s liability and when the fund must indemnify them. They matter because they define whether the GP bears consequences for misconduct or whether costs are shifted onto LPs. This section should typically address:

• Exculpation — The GP and its affiliates, management company, investment manager, LPAC members («Covered Persons») should be shielded only from ordinary negligence. Liability should remain for fraud, gross negligence, or willful misconduct. Anything broader undermines accountability.
• Indemnification — The fund may indemnify the Covered Persons for costs and claims arising from fund activities, but with clear carve-outs: no indemnity if the liability arises from the Covered Persons fraud, gross negligence, willful misconduct or internal disputes between the GP and its affiliates.
• Carve-out — In the event of internal disputes between the GP, Investment Manager, or their affiliates, the fund should not bear or advance any legal or other costs associated with resolving those disputes. This also applies for cases brought by a majority of LPs against the GP/IM.
• Insurance — Directors & Officers or Errors & Omissions insurance can backstop indemnification, but premiums should be a fund expense only if reasonable and disclosed.

xvii) Withdrawal (LP)

Withdrawal clauses should be narrowly drafted so they protect the fund, not shield the GP. The key test we apply is whether an LP can ever be forced out because of issues relating solely to the GP or its affiliates. The answer should be no.

Properly structured provisions allow withdrawal only if continuing participation by the LP would itself create a problem — for example, a material violation of law, tax, or regulatory requirements applicable to that LP. That is legitimate and should remain the standard.

xviii) Excused / Defaulting Partner

These provisions determine how the fund handles two situations: when an LP is legitimately excused from an investment, and when an LP defaults on its obligations. Excuse rights should be tightly limited — for example, where a particular investment would cause an LP to breach law, regulation, or tax restrictions. When an excuse is granted, the resulting shortfall must be reallocated. We prefer to see a cap on how much other LPs can be required to fund as a result of another investor’s excuse . Anything beyond that risks unfairly concentrating exposure on compliant LPs.

Default provisions address failures to meet capital calls. Remedies usually include interest on overdue amounts, suspension of distributions, and eventual forfeiture or forced sale of the defaulting LP’s interest. One key point is management fees: even if an LP defaults, its share of management fees should not be shifted onto the non-defaulting LPs. Instead, the defaulting LP should remain liable for its pro rata portion of fees, preventing compliant investors from subsidizing its shortfall.

xix) Liability of the LPs

LP liability should be expressly limited to the amount of each LP’s capital commitment, except as required by statute or explicitly agreed in the LPA (e.g. for return of wrongful distributions). We expect to see language making clear that LPs cannot be required to contribute additional funds beyond their agreed capital commitment (outside of equalization interests which are not due to fund but initial LPs). Anything less leaves room for unexpected exposure.

xx) Fiduciary Issues

This section deals with the scope of fiduciary duties owed by the GP. Fiduciary duties must not be hollowed out by overly broad exculpatory language. We are cautious when the LPA grants the GP “sole discretion” or states that it may act in its own interest without regard to LPs and LPAC members. While the GP needs operational flexibility, fiduciary duties should remain intact — the GP must act in good faith and in the best interests of the fund as a whole. Clauses that attempt to contract around this core obligation are a red flag.

xxi) Confidentiality

Confidentiality provisions regulate how fund information may be used and disclosed by LPs. They are important for protecting sensitive portfolio data while still allowing investors to meet their own obligations. We expect to see LPs required to keep fund information confidential, with exceptions that are standard and practical — disclosure to regulators, auditors, advisors, or as required by law or internal governance.

xxii) Power of Attorney

Power of attorney provisions authorize the GP to act on behalf of LPs for specified fund matters. They are standard and necessary for efficient operation, but the scope must be carefully limited. We expect to see the power confined to administrative and fund-related purposes: executing fund documents, amendments required by law, filings with regulators, and actions needed to carry out the fund’s business. The language should be as narrow as possible while still giving the GP the tools to operate.

xxiii) Advisory Committee

The LP Advisory Committee (“LPAC”) is the main governance body through which LPs exercise oversight between formal votes. Its role is not to run the fund, but to provide checks on conflicts and gray areas in the LPA. A well-structured LPAC enhances alignment without undermining GP discretion. Key points we focus on:

• Composition — Typically 3–5 representatives from significant LPs, appointed by the GP but balanced to reflect the investor base. No single LP should dominate.
• Mandate — Review and approve conflicts of interest (e.g. cross-fund transactions, affiliate dealings), valuation methodology for illiquid assets, and extensions of the fund term or investment period.
• Limitations — LPAC approval should not waive fiduciary duties or retroactively bless misconduct. The committee is there to opine on conflicts, not to assume any GP’s responsibilities.
• Meetings and reporting — Regular meetings (quarterly or semi-annual) with clear minutes and access to necessary information. LPAC members should also have rights to call special meetings if issues arise.
• Confidentiality and liability — Members should be indemnified for their service, subject to good faith, and bound by confidentiality to protect fund information.

xxiv) Dispute Resolution

Dispute resolution provisions set out how conflicts between LPs and the GP are handled. In reviewing them, we focus on a few essentials:

• Jurisdiction and law — The governing law should be clearly tied to the fund domicile (e.g. Delaware, Cayman, Luxembourg, etc.) with no ambiguity.
• Venue — Litigation in the domicile courts is standard.
• Arbitration provisions — If arbitration is required, it should fall under a neutral, established framework (e.g. AAA, JAMS, LCIA) with balanced procedures, rather than GP-controlled processes.
• Waiver of jury trial — Often paired with arbitration provisions, these clauses provide for disputes to be resolved without a jury, typically through arbitration or by a judge.
• Scope — The clause should not go so far as to bar LPs from pursuing legitimate claims or restrict statutory remedies.
• Costs — Each side bearing its own costs is acceptable; fee-shifting in favor of the GP only is not.
• Collective actions — Provisions that prevent LPs from coordinating claims or acting collectively are a red flag.

In short, the framework should provide certainty on governing law and forum, allow for fair adjudication, and not tilt the balance by limiting LP rights or remedies.

5. OPERATIONAL DUE DILIGENCE

After our thorough review of the legal side, we’ll switch our focus towards the operational side of the fund. This section will cover key aspects by going through 5 key sections Organization & Team, Compliance & Oversight, Investment & Risk Controls, IT & Security, Digital Assets.

i) Organization & Team

A fund’s governance is anchored in its ownership structure, the individuals leading it, and the committees that provide checks on decision-making. These elements show whether the GP and the investment manager/advisor have the stability, expertise, and discipline needed to manage investor capital responsibly.

a. Firm Structure & Governance

The foundation of a manager lies in how the firm is structured and governed. Ownership concentration, oversight mechanisms, and resource allocation all shape the GP’s ability to operate with stability and transparency:

• Ownership — Concentrated ownership without a succession plan increases key-person risk, while broader equity participation across principals signals institutional durability. Most importantly, the ownership should be aligned with the role of each principal.
• Committees — Investment, risk, valuation, or management committees are a sign of discipline. What matters is not their existence alone, but their mandate, composition, and whether minutes and voting records are kept.
• Investor concentration — If one LP holds more than 25% of commitments, that LP can distort governance dynamics. A balanced investor base keeps the GP accountable to the partnership as a whole.

We also look for disclosure of the fund’s annual budget to confirm that compliance, risk management, and operations are adequately resourced. Finally, any history of bankruptcy at the firm or affiliate level must be transparent, with explanation of circumstances and corrective measures taken.

b. Team & Human Capital Management

Even with a solid structure, a fund is only as strong as its people. Assessing headcount, turnover, and stability gives insight into whether the platform is sustainable.

We look at the total number of employees, both investment and operational, to gauge whether the team is sized appropriately for the mandate. Turnover of key professionals in the past requires close scrutiny: high turnover may indicate cultural or strategic problems, while stable tenure builds confidence.

We also review whether principals face any personal or professional risks — such as litigation or financial distress — that could impair their ability to serve. A history of key-person events and for-cause removal situations also informs our view of resilience: well-handled events show institutional depth, while poorly managed ones reveal fragility.

Forward planning matters. Significant staff additions or reductions should be backed by a coherent growth plan rather than reactive moves. On hiring practices, structured onboarding with background and criminal checks is a sign of institutional maturity; purely informal recruitment processes are not.

c. Compensation & Alignment

Economics drive behavior. The GP’s own financial stake and the way rewards are shared within the team tell us whether incentives are aligned with LPs. GP commitment is the first test. We prefer to see capital funded with cash, but for emerging managers, partial use of management fee waivers may be acceptable. The principle is simple: GPs must feel the same downside as LPs.

We then review how management fees and carried interest are allocated. Carried interest heavily concentrated in one or two individuals creates fragility; broadly shared economics create stability. In addition to this, deferred compensation mechanisms such as vested carry aligned with the investment period help lock in long-term retention.

iv) Compliance & Oversight

a. Compliance & Regulatory Oversight

Strong compliance begins with independence and authority. A Chief Compliance Officer (CCO) and Chief Financial Officer (CFO) should both be in place — whether internal or outsourced — with clear reporting lines and separation from the investment process. Day-to-day oversight requires a dedicated operations team, so compliance and finance aren’t handled ad hoc by deal staff.

Regulatory status must be transparent: registration with the SEC, FCA, AIFM, or CFTC where required, or a clearly documented exemption. If regulators have conducted examinations in the past, results and remediation steps should be disclosed.

The firm should operate under a documented compliance framework: monitoring procedures, escalation paths, periodic testing (internal or third-party), and annual staff training. Any breaches in the last three years need to be reported alongside corrective actions.

Core elements of a credible compliance program include a Code of Ethics and personal trading policy with active monitoring of staff trades. We also expect a pre-execution control process, where legal or compliance signs off before any investment or fund action is taken, to ensure the LPA is never inadvertently breached. Onboarding should be supported by robust KYC and AML procedures that meet both local and international standards, with periodic refreshes to capture evolving risks.

b. Legal & Insurance

Investors need full disclosure of any criminal, civil, or administrative proceedings involving the firm, its affiliates, or employees, past or present. This includes litigation, regulatory investigations, or industry body reviews. Even pending or ongoing matters must be described with enough detail for LPs to assess potential impact. Silence or vague references here undermine confidence.

Insurance is the second pillar. At minimum, we expect policies covering E&O (errors and omissions), D&O (directors and officers), cyber, and general liability. Details of coverage limits, carriers, and exclusions should be made available, along with disclosure of claims made in the last three years. Who bears the cost is also critical: fund-level insurance should protect LPs, while business risks tied to the management company belong on the GP’s balance sheet.

Finally, the use of placement agents or distributors during fundraising must be declared. LPs want to know who is being paid, on what terms, and whether some fees are offset against management fees.

c. Conflict of Interest & Fraud Prevention

What we test for here is whether conflicts are identified, disclosed, and actively managed. Key points include:

• Employee economic interests — Staff should not hold undisclosed stakes in portfolio companies. If they do, policies must govern disclosure and approval.
• Personal & financial ties — Relationships with investors, service providers, or decision-makers must be declared to avoid undue influence.
• Service provider interests — Service providers should not hold, directly or indirectly, any economic interest in the fund that could compromise their objectivity or create a conflict of interest. Where such interests exist (e.g., if an auditor or a fund administrator invests in the fund) the relationship must be fully disclosed, justified, or approved by the LPAC or investors.
• External activities — Employees engaged in outside businesses must be monitored to prevent overlaps with fund activity.
• Other business income — Income streams at an underlying portfolio company or affiliate level should be structured so they do not compete with or disadvantage the fund.
• AML/KYC policy — A formal, documented policy is expected; ad hoc onboarding is insufficient.
• Anti-bribery & corruption — Compliance with FCPA, UK Bribery Act, and equivalent regimes should be codified and tested periodically.
• Follow-on investments — If the GP leads later rounds, valuation conflicts must be addressed through independent inputs or LPAC oversight.

We don’t expect a world without conflicts — we expect systems and disclosure strong enough to ensure they are handled before they compromise alignment.

d. Cash & Treasury Controls

Cash handling is one of the most sensitive areas of fund operations. LPs expect clear procedures for capital calls, transfers, payments, and distributions, with responsibilities assigned to specific individuals and subject to oversight. Wire transfers in particular should require dual authorization, supported by authentication tools such as tokens or multi-factor systems. Initiation and approval must be segregated to avoid concentration of control.

Authority over cash should be tightly managed. Only designated senior staff should be authorized signers for bank accounts or investment-related documents, and the ability to open new accounts should require high-level approval. Thresholds for transaction size should exist so that larger transfers trigger additional signoffs.

Regular reconciliation of fund cash balances must be performed by one staff member and reviewed by another, ensuring proper separation of duties. Policies should also define what qualifies as a cash-equivalent investment — typically T-bills or money market funds — and set limits on idle cash. Excess balances should be managed prudently, with a maximum threshold for short-term holdings.

Institutional managers also diversify counterparty risk by maintaining multiple banking relationships. Any credit lines or borrowing facilities at the fund, GP, or management company level must be disclosed, with clarity on their purpose and terms.

Robust treasury controls of this kind not only protect investor capital but also serve as a clear marker of institutional maturity. Weak or opaque practices in this area remain one of the fastest ways to undermine investor confidence.

iii) Investment & Risk Controls

a. Investment Process & Decision-Making

The investment process is at the heart of fund discipline. We expect managers to articulate how deals move from sourcing to execution — from origination, screening, and diligence, through to committee approval and allocation. This isn’t just about generating pipeline, but about showing a repeatable, documented process that can scale.

Decision-making should be governed by a clear voting structure. Some firms operate on unanimous consensus, others on majority or supermajority rules. What matters is that roles and responsibilities are defined, conflicts are managed, and no single individual can unilaterally approve an investment.

Where multiple funds are active at the same time, policies must govern investment priority to prevent conflicts across vintages. Managers should also explain whether the current fund’s strategy differs materially from previous funds, and if so, why. Abrupt strategic pivots raise questions about discipline and track record comparability.

Third-party involvement can add depth — for example, specialist firms supporting technical due diligence or background checks — but the GP should retain ultimate accountability. We also test whether the GP has the capacity to execute at the target fund size, since scaling deal flow is often harder than raising capital.

A credible process also addresses what not to do. Excluded themes or sectors should be disclosed upfront. Follow-on policies must be clear: how reserves are sized, whether recycling is allowed, and how subsequent rounds are assessed. Without these guardrails, capital allocation risks becoming opportunistic rather than strategic.

Finally, cross-fund investment policies need clear allocation. Without them, conflicts arise between vintages — e.g., favoring one fund’s follow-on over another’s. Clear rules protect LP alignment.

b. Risk Management & Operational Controls

Strong investment platforms back their strategy with resilient operational infrastructure. Portfolio accounting and risk systems should be fit-for-purpose and integrated into reporting. If hedging is contemplated, managers must explain the rationale (risk mitigation versus speculative positioning) and outline the instruments used.

Independent assurance matters. We look for SOC reports (SSAE18/ISAE3402) from both the GP (where relevant) and the fund administrator. Audited annual reports for all active funds, ideally from a top-tier audit firm, provide further comfort.

Service providers are another key layer of control. We expect disclosure of any changes, the due diligence process for selecting administrators, custodians, or auditors, and whether providers are reviewed on an ongoing basis. If middle or back-office functions are outsourced, monitoring controls must be in place to ensure service levels are met.

Counterparty risk cannot be ignored. Firms should disclose whether any prior funds have suffered losses due to counterparty failure. We also test whether auditors provide non-audit services to the GP or management company, since this can compromise independence.

Finally, if expert networks are used, they should be chaperoned by compliance (typically the CCO) to ensure no material nonpublic information is accessed improperly.

c. Valuation & Financial Integrity

What we assess here is whether valuations, audits, and economic calculations are handled with independence and rigor. The key checks:

• Valuation policy — It should be formalized, applied consistently, and ideally anchored in IPEV Valuation Guidelines. Material changes in methodology over the last three years should be rare and well-justified.
• Independence and controls — Valuation should not rest solely with deal teams. We look for separation of duties, independent verification, and a clear conflict-resolution mechanism (often via LPAC).
• Accounting standards — Funds should operate under recognized frameworks (IFRS, US GAAP, or local GAAP) with no deviation that obscures comparability.
• LPAC role — Composition should be balanced across investor types. LPACs should have a defined role in reviewing portfolio-related conflicts, and in some cases may be asked to review or approve valuations.
• Audit record — Funds should demonstrate a clean track record: no adverse nor qualified audit opinions, no NAV restatements. Any exception must be fully documented, including the circumstances and corrective actions taken.
• Fee and carry calculations — Management fee and carried interest calculations should follow written procedures, with clear oversight on who prepares, reviews, and approves them. Independent checks lower the risk of error or manipulation.

A fund that falls short on these basic risks undermining confidence in its reported performance and in its governance more broadly.

iv) IT & Security

a. IT Infrastructure & Cybersecurity

Robust IT infrastructure and cybersecurity practices are now table stakes for institutional-grade managers. Weakness here not only exposes sensitive investor and portfolio data but also signals a lack of operational maturity. We focus on the following areas:

• Core protections — Firms should have baseline defenses in place: antivirus, anti-malware, firewalls, and intrusion detection. These need to be documented and monitored, not just installed once. Over-reliance on generic, off-the-shelf tools without active oversight is a concern.
• Governance and responsibility — We prefer to see either a dedicated internal IT lead or a retained external consultant with clear accountability. Ad hoc arrangements, where IT is left to “whoever handles it,” are a red flag.
• Device and data policies — Formal rules should govern laptop and smartphone usage, with mandatory encryption for hardware and for transmission of sensitive data. Remote access should be controlled through secure VPN or equivalent solutions. Firms that allow unrestricted personal device use without controls increase vulnerability.
• Password and access management — We expect documented policies on complexity, rotation, and multi-factor authentication. Shared accounts or lax reset procedures are signs of weak internal control.
• Data storage and backups — Essential data should be stored securely (either encrypted internal servers or vetted cloud providers) with automated backup processes. Real-time replication or frequent system imaging is now common practice. Lack of redundancy introduces unnecessary operational risk.
• Threat detection and response — Firms should have clear processes to detect phishing, hacks, or unauthorized access attempts, with escalation protocols. Penetration and vulnerability testing, ideally annual and by third parties, provides confidence that controls are not just theoretical.
• Track record and scalability — We ask whether the firm has ever had a breach, and how it was managed. Just as important is whether systems are designed to scale as the firm grows, so operational risk doesn’t rise in parallel with assets under management.

b. Disaster Recovery & Business Continuity

Business continuity and disaster recovery plans are about proving resilience when operations are disrupted. A credible plan goes beyond IT recovery and addresses how the firm keeps functioning if key people, systems, or facilities are suddenly unavailable. At a minimum, we expect to see a written Business Continuity Plan (BCP) and Disaster Recovery Plan (DRP), reviewed annually and tested in practice, not just on paper.

The strongest frameworks anticipate multiple failure points. If a decision-maker is incapacitated, there should be clear delegation procedures, so investment and operational approvals do not stall. If systems fail, backup infrastructure — ideally offsite or cloud-based — should be able to take over within defined recovery times. Facility loss or inaccessibility should trigger remote work protocols, tested to ensure employees can operate securely from alternative locations without interrupting fund operations.

Physical security underpins all of this. Offices and server rooms should have restricted access, logging, and monitoring to prevent unauthorized entry into systems. For digital assets in particular, hardware wallets or secure key storage must be integrated into continuity planning.

What we expect to see is a living framework: tested backups, documented recovery times, named individuals with assigned responsibilities, and evidence of rehearsal. What doesn’t inspire confidence is a generic plan that hasn’t been updated for years or has never been tested in practice. Institutions want to know not just that a plan exists, but that it will work under stress.

v) Digital Assets

a. Risk Management

In digital asset strategies, risk management is often the single biggest differentiator between institutional-quality managers and opportunistic trading outfits.

Leverage is the first area we focus on. If used at the portfolio or position level, there should be clear thresholds and monitoring, with transparency on how margin calls are managed and how exposure is stress-tested against extreme market moves. Financing constraints, such as borrowing only against certain liquid assets or within capped ratios, should be spelled out to prevent silent accumulation of risk.

Liquidity and capacity constraints are equally important. Position sizing must reflect slippage and market depth in thinly traded tokens, while overall fund size should be capped relative to strategy capacity. We prefer to see explicit asset under management limits and internal reviews of scalability, rather than open-ended growth.

Stress testing is a hallmark of disciplined managers. Simulations under different market regimes, liquidity freezes, or counterparty failures demonstrate that the firm has thought through tail risks. Operational risk identification (from private key management to exchange outages) should be structured within a defined framework rather than handled reactively.

Finally, regulatory risk cannot be ignored. Holding tokens or SAFTs that may be deemed securities by regulators introduces significant enforcement exposure. We expect managers to demonstrate proactive legal review and to show a process for monitoring how new rulings or enforcement actions might affect the portfolio.

b. Trading Infrastructure & Controls

Trading infrastructure in digital assets is where operational maturity (or lack thereof) becomes most visible. Execution systems, reconciliation practices, and wallet management all determine whether a firm can operate at institutional scale without undue risk. We break it down as follows:

• Systems architecture — A professional-grade setup usually combines an OMS/PMS/EMS with portfolio accounting. These allow orders, positions, and risk to be tracked in real time. A reliance on spreadsheets or ad hoc tools is a warning sign.
• Error policies — Trade and system error policies should be written and enforced. Key points include how errors are identified, reported, and who bears the cost (ideally the manager, not the LPs).
• Execution channels — Managers should disclose how trades are executed: centralized exchanges, OTC desks, brokers, custodians, or DEXs. If DEXs are used, we want to see robust processes around liquidity checks, slippage control, and counterparty verification.
• Confirmation and settlement — Every trade should be reported, verified, and reconciled against counterparties, typically daily. We look for segregation of duties: one person executes, another verifies, and operations reconcile.
• Authorized traders — Only specific team members should be authorized to trade, with named individuals and a record of delegated authority. Unlimited access across the investment team creates risk of error or abuse.
• Wallets and access controls — Use of non-custodial wallets (e.g., Ledger, MetaMask) must be accompanied by strong access and private key management. Multi-sig or MPC structures are preferable. Whitelisting for outgoing transfers is an important control to prevent misdirected funds.
• Post-trade oversight — Any historic errors should be disclosed along with how they were handled. More important than the error itself is the process: was it caught quickly, remediated fairly, and prevented from recurring?

Taken together, these controls are about proving that execution is systematic and controlled, not opportunistic. Institutions want evidence that every trade is supported by infrastructure strong enough to withstand regulatory, operational, and market scrutiny.

c. Custody & Asset Safeguarding

In digital assets, custody is the cornerstone of operational risk management. Unlike traditional securities, where clearinghouses and custodians provide standardized protection, here the choice between cold storage, hot wallets, third-party custodians, or MPC wallets directly defines the fund’s exposure to theft, error, or loss.

We look closely at custody architecture. Institutional practice is to hold the majority of assets in cold or MPC custody, ideally through reputable third-party providers. Self-custody can be acceptable but only with rigorous controls around private key management, multi-sig or MPC protocols, and segregation of duties. A setup that relies on a single individual controlling private keys is unacceptable.

Insurance is another dimension. The best custodians provide insurance coverage against theft or hacks, though coverage is often limited. We expect disclosure of policies, limits, and insurers. A lack of insurance doesn’t disqualify a setup on its own but combined with weak custody practices it signals heightened risk.

Access controls and withdrawals should be governed by M-of-N approval mechanics, strict whitelisting of withdrawal addresses, and real-time monitoring. Beyond storage, custody control should address how assets can move and who controls the process.

We also test for operational history. Has the fund ever lost assets due to hacks, lost keys, or exchange failures? If yes, how was the incident handled, and what has changed since? Firms unwilling to disclose such history are cause for concern.

Finally, the scope of custody extends beyond pure storage. Many strategies involve staking, lending, or yield farming. These activities introduce additional risks (from slashing penalties to counterparty defaults) and should be explicitly covered by policy. Similarly, if fiat or stablecoins are held on exchanges or with OTC desks, we expect accounts to be segregated at the fund level.

d. Counterparty & Service Provider Oversight

Counterparty risk can be as significant as market risk. Exchanges collapse, OTC desks disappear, and custodians face security breaches — which makes the process for selecting and monitoring service providers a core part of institutional due diligence.

We expect to see a formal evaluation framework before engaging with any counterparty, whether centralized exchanges, brokers, OTC desks, custodians, or DEX protocols. This typically includes reviews of financial strength, regulatory standing, operational track record, cybersecurity measures, and transparency around reserves or audits. For DEXs, added scrutiny is needed on smart contract security and governance.

Counterparty oversight is not a one-time exercise. Ongoing monitoring through credit checks, trading volume analysis, service performance reviews, and updated due diligence should be embedded in the process. If a counterparty relationship has been terminated, the reasons matter: was it due to financial instability, service failures, compliance concerns, or strategic realignment? We want to see that managers are proactive, not reactive, in addressing weaknesses.

We also look at policy adjustments over time. For instance, if the firm has ceased using certain DEXs or protocols, there should be a clear rationale tied to risk management, such as concerns over liquidity, governance, or code vulnerabilities.

e. Protocol & Projects Involvement

This area overlaps with the broader conflict of interest discussion but deserves its own treatment given how common protocol-level involvement is in this asset class. Unlike traditional funds, managers here may actively participate in protocol governance or receive economic incentives directly from projects, which introduces unique alignment questions.

We focus on two dimensions. First, governance roles — if principals hold voting power, board seats, or advisory roles within protocols, the scope and responsibilities must be disclosed. The concern is whether such influence could be exercised for the benefit of the protocol or manager rather than the fund’s investors.

Second, compensation from projects — token allocations, grants, or advisory fees tied to assets also held by the fund should be disclosed and, in many cases, offset against fees. Without this, managers risk being paid twice: once by LPs and again by the project.

6. ESG DUE DILIGENCE

i) Firm-Level

This assessment is about understanding whether the firm and key managers actively integrate ESG withing their operations and into their culture. A few areas we typically review:

• Frameworks and memberships — Having a defined ESG or sustainability policy provides clarity and consistency. Membership in initiatives such as UNPRI, IIGCC, or B Corp can be a useful signal of commitment, though not essential.
• Oversight and expertise — Assigning responsibility for ESG to specific individuals, ideally with some relevant training, helps make sure the topic is actively managed.
• Workforce diversity and inclusion — Investors increasingly pay attention to diversity within investment teams and, more importantly, within decision-making groups. Tracking metrics and being transparent about composition is a good step forward.
• Workplace culture and policies — We like to see documented policies on anti-discrimination, equal opportunity, and harassment. Beyond compliance, firms that set measurable wellbeing or workplace culture goals and monitor progress tend to stand out.
• Employee incentives and development — Linking ESG awareness to training, performance feedback, or even compensation can reinforce alignment. Offering benefits beyond the minimum is often appreciated by staff and LPs alike.
• Holidays & caregiver paid leave — Unlimited or highly flexible leave policies can appear progressive. We focus less on policy design and more on whether employees feel supported to use their time off and caregiver leave without barriers.
• Environmental responsibility — Even simple steps, such as monitoring and offsetting team carbon emissions, show awareness. For early-stage managers, this can be a straightforward way to demonstrate intent.

At the firm level, ESG integration is ultimately about building a disciplined, values-driven organization where responsible practices reinforce long-term performance. Policies, culture, and accountability mechanisms matter less as isolated measures than as signals of how the firm operates day to day. LPs look for managers who approach ESG not as compliance, but as part of maintaining a healthy, durable organization capable of attracting talent, earning trust, and sustaining commitment over time.

ii) Fund-Level

Here, LPs want to understand not just what the GP avoids, but also how it engages with companies to create positive outcomes and mitigate risks. Key areas of focus include:

• Exclusion criteria — Many managers apply sector-based exclusions (e.g., alcohol, tobacco, gambling, adult entertainment, ammunitions, fossil fuel exploitation). The specifics vary, but what matters most is clarity and consistency in applying these criteria.
• Unintended consequences — Strong managers go beyond exclusions to assess broader externalities. For example, an investment may be attractive financially but carry social or environmental downsides. Identifying these risks early and working with founders on mitigation is increasingly seen as good practice.
• Governance in portfolio companies — Requiring independent board representation, often one-third of seats, is a practical way to improve oversight.
• Support for founders — Sustainability strategies, goal setting, and even wellbeing support (mental and physical) are becoming part of how GPs differentiate themselves. These efforts show LPs that ESG integration is proactive, not reactive.
• Diversity in the portfolio — Tracking the diversity of founders and teams is another marker of maturity. Some managers set targets for backing underrepresented founders or explicitly support portfolio companies in diversifying their teams and hiring practices. The aim is less about hitting quotas and more about building awareness, asking the right questions, and providing resources when needed.

Overall, fund-level ESG is about extending principles into practice, ensuring portfolio construction, governance, and founder support all reflect the values and commitments the GP outlines at the firm level. LPs recognize that early-stage companies may not be ESG leaders from day one, but they value managers who make ESG a part of the growth journey.

The goal is not to tick every box but to create a credible narrative: that the firm takes ESG seriously at an organizational level, applies it consistently, and is prepared to evolve as expectations increase.

7. SIDE LETTER

Side letter supplements the LPA to clarify, adjust, or enhance specific rights and obligations for individual investors without altering the core terms of the fund. It ensures that operational, governance, and information practices reflect institutional expectations even where the base documents are silent or ambiguous. While the content can vary significantly, we typically address the following points.

i) Co-Investment Rights

We request co-investment rights to ensure fair access to direct exposure when the fund pursues larger or concentrated opportunities. The intent is not preferential treatment but proportional participation. A standard formulation entitles us to our pro-rata share of each co-investment opportunity, measured against our commitment relative to other eligible LPs. This maintains equitable access, prevents selective allocation, and reinforces alignment by ensuring the GP does not favor relationships outside the fund’s LP base.

ii) Secondaries Rights

Participation rights in secondary sales provide transparency and continuity. They allow us to participate in any secondary transfer process should existing investors sell fund interests. This helps maintain control over our relative position and ensures that any transfer opportunities are handled on equal and disclosed terms. It also discourages opaque re-allocations that could shift influence or alter fund dynamics post-closing.

iii) Investment Restrictions

Investment restrictions translate our broader responsible-investment standards into enforceable terms at the fund level. Beyond the LPA’s general prohibitions, we also set specific exclusions including arms trading, gambling, tobacco, alcohol, human cloning, fossil fuel extraction, and other illegal or unethical sectors. The intent is to align investment activity with our ESG framework and reputational thresholds. We also expect confirmation that ESG principles are embedded in due diligence. This ensures investments are not only compliant but consistent with long-term sustainability and fiduciary integrity.

iv) Confidentiality

Confidentiality provisions balance fund privacy with our reporting obligations to our own investors. We require the right to disclose limited, factual information such as portfolio composition, valuations, performance metrics, and capital movements to our limited partners and their advisors. This ensures we can maintain transparency across our investor base while respecting the GP’s legitimate confidentiality interests. The clause formalizes what is already standard for institutional funds and avoids recurring negotiation over disclosure boundaries.

v) Power of Attorney

The Power of Attorney clause limits delegation to the minimum required for fund operation. We require explicit confirmation that the GP’s authority is confined to administrative execution (e.g., signing amendments, filings) and does not extend to altering our economic terms, expanding liability, or binding us to new obligations without consent. This preserves our legal protection and ensures that investor consent remains a condition for any material change.

vi) Litigation

Representations around litigation safeguard us from undisclosed contingent liabilities or reputational exposure. We require the GP to confirm that neither it, the fund, nor its affiliates are subject to or aware of any pending or threatened legal, regulatory, or administrative actions that could materially affect operations or investor interests. This warranty provides an early integrity check and forms a continuing disclosure obligation if circumstances change.

vii) Parallel Funds

Parallel fund language prevents implied obligations. We confirm that our commitment applies only to the specific vehicle we invest in, and that participation in any parallel fund requires our express written consent. This avoids unintended cross-allocations or exposure to structures with different fee, tax, or jurisdictional characteristics.

viii) Most-Favored Nation (MFN)

The MFN clause ensures equality across investors by granting us access to any preferential rights or terms granted to others of comparable size or commitment. It acts as a fairness mechanism, protecting us from disadvantage should subsequent investors negotiate more favorable economic, governance, or reporting conditions.

ix) Other Common Clauses

Other common clauses, non-exhaustive but frequently included in institutional side letters, address the following areas:

• Notifications — The GP must promptly inform investors of material developments such as changes in service providers, litigation, or proposed amendments to fund documents.
• Severability — A standard clause ensures that if one provision becomes invalid, the remainder of the side letter remains fully enforceable.
• Advisory committee — Clauses confirming LPAC participation, observer rights, or consultation procedures ensure proportional governance oversight and transparency.

8. REPORTING

Robust, transparent reporting is key to institutional trust. It allows investors to assess not only performance but also the discipline, consistency, and integrity of a manager’s operations. For venture capital firms, where illiquidity and long time horizons can obscure interim results, clear reporting ensures that investors can track value creation and capital deployment in real time. Best practice combines completeness with clarity: LPs should be able to reconcile portfolio developments, fund-level movements, and performance outcomes without ambiguity.

i) Fund Performance

Quarterly reporting should balance clarity, completeness, and consistency. The quarterly letter is the central narrative document through which LPs track portfolio activity, assess manager judgment, and understand sources of value creation. It is expected to become available to LPs within the next 90 days following the end of the quarter and should provide structured visibility into:

• Portfolio movements — Summaries of new investments, exits, and material portfolio events, including timing, strategic rationale, and fit within the broader fund mandate. LPs should also see brief updates on partial realizations, write-downs, and liquidity events.
• Follow-on rounds and reserve management — Discussion of follow-on participation, decision criteria, and capital allocation logic. LPs expect insight into whether participation was driven by conviction or support needs, and how reserves are being managed across the portfolio.
• Performance drivers — A balanced discussion of the primary factors influencing portfolio valuation, both positive and negative. Operational progress, financing milestones, and market conditions should be covered factually, with no selective emphasis.

Following the narrative section, the letter should be complemented by a comprehensive portfolio evolution table, enabling LPs to link qualitative commentary with quantitative data. This table should list all active and realized investments, ideally sorted by initial investment date, and include follow the below template:

i) Fund Operations

Beyond portfolio reporting, the operational side of fund reporting is an essential tool for monitoring performance and capital deployment. There are two types of reporting: quarterly and annual.

a. Quarterly Reporting

For institutional investors, Capital Account Statements (typically produced by the fund administrator) are essential. They provide verifiable data on:

• Net Asset Value (NAV) — The fund’s total fair value and a measure of progress over time.
• Fund size — Total committed capital, clarifying the scale of the fund.
• Invested capital — How much has been drawn and allocated to portfolio companies.
• Remaining commitment — Future capital still callable, a key indicator for liquidity planning.
• Distributions — Realized proceeds, which feed directly into LP-level performance reporting.

These metrics form the quantitative basis for our own internal reporting and risk monitoring. They allow us to reconcile exposure across funds, track cash flows, and validate that capital movements align with the fund’s governing terms.

b. Annual Reporting

As part of our reporting review, we require the fund’s audited financial statements at least annually to confirm they are free from material misstatements and not subject to qualified or adverse audit opinions. Any exception must be fully documented, including the circumstances and corrective actions taken.

9. DATA ROOM

Now that we’ve covered the full due diligence process, we conclude this handbook with a critical component for any GP: fundraising. Successful fundraising depends on a well-organized data room compiling all documentation investors expect. Beyond compliance, a complete structured data room signals institutional maturity, discipline and transparency. It enables sophisticated LPs to assess a fund’s strategy, governance, and operations efficiently, reducing friction and accelerating investment decisions. The outline below summarizes the key materials typically expected, grouped by category.

i) Investment Materials

Investment materials form the foundation of a GP’s data room. They give LPs visibility into the fund’s strategy, track record, and investment discipline, providing evidence of how the team sources, underwrites, and manages opportunities.

• Pitch deck — The pitch deck should clearly articulate the fund’s investment strategy, target market, differentiation, and edge. LPs expect a concise but substantive overview of the opportunity set, fund size rationale, team composition, and key terms. It should also include high-level portfolio construction parameters and risk management principles.
• Sample investment memos — Investment memos serve as proof of the GP’s underwriting discipline. LPs review them to understand how ideas are screened, risks are identified, and conviction is formed. Each memo should include the investment thesis, valuation assumptions, scenario analysis and exit rationale. The goal is to provide transparency into the decision-making process rather than to highlight only successful deals.
• Fund model — The fund model serves as the financial blueprint of a venture strategy, bridging qualitative ambition with quantitative discipline. It should clearly lay out how capital is allocated across new and follow-on investments, fees, and reserves; the structure of portfolio construction including target ownership, diversification, and pacing; and the mechanics of distributions through gross-to-net performance and carry waterfalls. Strong models also include sensitivity analyses to stress-test assumptions on exit timing, hit rates, and valuation multiples. For LPs, this document is less about forecasting precision than about assessing internal consistency, understanding liquidity patterns, and evaluating whether the GP’s assumptions and incentives align with sustainable, long-term value creation. For a concrete example, SVB has published an article about it and allows you to download a template here.
• Detail track record- Historical performance remains the cornerstone of any investment evaluation. LPs expect a detailed track record showing each previous vintage’s key performance metrics (TVPI, DPI, IRR) as well as detailed portfolio summary ideally updated for the latest quarter. You can find our typical template with all the required information on the next page.

i) Team & Governance

LPs evaluate the team as closely as they assess the strategy. A fund’s ability to execute depends on the depth, cohesion, and continuity of its key professionals. The team section of the data room should provide both transparency and evidence of institutional organization.

• Team biographies — Include concise, standardized profiles for all partners and investment professionals, highlighting relevant experience, sector focus, and prior fund involvement. References or testimonials can help validate reputation and integrity, particularly for emerging managers.
• Organizational chart and governance structure — A clear organizational chart should outline reporting lines, key functions, and decision-making authorities. LPs look for a governance model that demonstrates segregation of duties between investment, compliance, and operations.
• Committees and decision-making bodies — If formal committees exist (Investment, Valuation, Risk, ESG), include their composition, mandate, and voting mechanics. This helps investors assess internal checks and balances and understand how decisions are made and reviewed.

ii) Legal & Fund Documentation

This section anchors the fund’s legal and contractual framework. It enables LPs to assess governance rights, economic terms, and regulatory soundness before committing capital. Completeness and version control are essential: all documents should be current, clearly labeled, and consistent across references.

• Limited Partnership Agreement (LPA) — As discussed in Chapter 4 — Legal Due Diligence, the LPA forms the foundation of an LP’s legal review and defines how the fund operates in practice — from governance and economics to investor protections.
• Private Placement Memorandum (PPM) (if any) and summary of terms — The PPM and term sheet summarize the fund’s strategy, structure, and key provisions in a standardized format. They serve as the primary investor disclosure documents and should be aligned with both the LPA and marketing materials.
• Subscription documents — These formalize each investor’s commitment and provide necessary regulatory and AML disclosures.
• Fund structure chart — As mentioned in Chapter 3 — Fund Formation, the fund structure chart illustrates the fund’s legal and operational architecture, showing entity relationships as well as jurisdictional setup.

iii) Operational, Compliance & Risk Management

This section demonstrates the fund’s institutional readiness. Investors rely on these materials to assess whether the GP’s infrastructure can protect capital, ensure transparency, and meet regulatory obligations.

• Core policies and manuals — The data room should include the firm’s Compliance Manual or Code of Ethics, Anti-Bribery & Corruption Policy, ESG and Equal Opportunity Policy, Valuation Policy, IT & Cybersecurity Policy, and Business Continuity or Disaster Recovery Plan. These documents evidence how the GP mitigates operational and reputational risks.
• AML & KYC procedures — Whether handled internally or by a third party, a clear description of anti–money laundering and investor verification procedures is critical, especially for funds holding investors from multiple jurisdictions. For example, in a typical mini master-feeder structure, U.S. investors participate through the onshore master (e.g., a Delaware entity), while non-U.S. investors invest through the offshore feeder (e.g., a Cayman Islands entity), both of which pool capital into the same master fund.
• Operational controls and reporting — Include our pre-filled ODD and ESG template questionnaires, SOC or ISAE 3402 reports (with bridge letters from the administrator), and recent audited financial statements (ideally for the past three years). Together, these materials confirm that independent oversight is in place and that fund data is accurate and verifiable.

Service provider information — A current contact list of key service providers (fund administrator, bank, custodian, auditor, and legal counsel) should be provided. LPs use this to validate the credentials and independence of third-party firms supporting fund operations.