This is the last in our series of 10 frequently asked questions from investors in venture capital partnerships.
Question: I’ve read that some GPs are suing LPs for not making capital calls. The LPs claim that they are cash constrained and/or the VC fund has not performed. Why throw more money their way? Do you see a trend here of broken contracts?
Answer: First, it would appear that the reports of numerous LP defaults exceed the reality. Based upon discussions with industry participants, most institutional LPs have, in fact, met their obligations to make capital calls. Second, the decision of a GP to sue an LP over a default is most often the absolute last resort. The GPs are not in business to institute litigation — this a distraction for the GP and added publicity that neither GPs nor LPs desire. When the LP Agreement is executed, all of the parties enter into a contract with the expectation that both LPs and GPs will honor their respective commitments. The GPs have committed their time, and have built an organization to implement an investment strategy and program for the fund. They should be entitled to rely on the contractual obligations of those sophisticated investors who agreed to support this program over the long term.
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