Fenwick private investment funds practice chair Byron Dailey talked to Business Insider about how things could play out if the COVID-19 pandemic affects some venture fund investors’ ability to continue their commitments to financing funds.
Dailey noted that if limited partners delay in responding to capital calls, penalties could include high interest on the outstanding amounts, legal action, or the loss of some or all of their partnership interests.
Dailey told Business Insider that these punitive provisions are common across funds and rarely change, and general partners have little incentive to change them.
"They don't get negotiated that much, and so they remain very draconian," he said.
Dailey pointed out that these provisions rarely need to be invoked, though, and both sides have an interest in working together to avoid defaults on calls for capital.
As a general partner, enforcing those penalties "should not be your first course of action," Dailey said. "Relationships are important. This is a long-term game that everyone is engaging in."
The full article is available on Business Insider (subscription required).