Letter to Prospective Limited Partners: Governance Before Growth

Luxembourg SCSp/SCA and Irish ICAV structures remain the default for pan-European marketing because pensions and insurers understand the supervisory perimeter. German AIF-KVG wrappers still attract DACH allocators who want BaFin context even when the master fund sits in Luxembourg — explain the stacking in PPM risk factors, not in a footnote after the first German DDQ.

Feeder architecture for US, UK, and Middle Eastern LPs should be resolved before anchor negotiation. Withholding, treaty access, and FATCA/CRS compliance delayed one mid-market close by eleven weeks when tax counsel joined after the anchor signed.

We do not advocate one domicile for every strategy. We advocate fixing architecture before marketing, because changing domicile mid-process resets regulatory timelines and reopens tax counsel on every LP pipeline name.

Authorisation or registration timelines still run four to nine months depending on jurisdiction and application completeness. ESMA's expectations on liquidity risk management and loan-originating AIFs bite infrastructure debt strategies that originate rather than buy secondary paper — leverage limits, valuation policy, and liquidity stress tests belong in the PPM, not in a post-close compliance memo.

Annex IV reporting, depositary oversight, and remuneration policies surface in institutional DDQs at first meeting now. Munich-based managers passporting across the EU should maintain a member-state matrix for private placement, pre-marketing, and reverse solicitation — updated quarterly by compliance, not rebuilt during each closing.

Pre-marketing interaction logs are dull until they are the only evidence that reverse solicitation was respected. We have seen regulators ask for them on the first institutional ticket.

LP advisory committees review conflicts — affiliated transactions, fee streams, co-invest allocation, valuation disputes — and institutional LPs increasingly expect portfolio-company fee transparency in quarterly packs. Charters should specify approval thresholds for affiliated deals, valuation methodology changes, and fee waivers.

DACH LPs often request LPAC seats or observer rights above defined ticket sizes (€50–100M is common in recent vintages). Limiting seats while granting observers is workable if the charter is explicit; silence breeds side-letter negotiation.

Valuation disputes correlate with affiliated transactions. LPAC review of both simultaneously reduces NAV arbitrage allegations that stall secondary processes.

Anchor negotiations generate fee discounts, co-invest rights, reporting covenants, and LPAC participation terms. Most-favoured-nation clauses trigger automatic entitlement — operational teams need a registry with MFN triggers and notification workflows, reviewed quarterly, not a spreadsheet discovered at the second close.

Standardising side-letter language where possible (ILPA-informed templates) preserves GP leverage while cutting legal cost per admission. Uncontrolled proliferation creates equalisation disputes at capital call stage — we have seen €180k+ in unnecessary legal fees on a single late close because MFN sweeps were manual.

First close requires minimum hard commitments, side-letter inventory, and equalisation interest mechanics for later closes. AML/KYC on sovereign and pension LPs still delays admissions; start 60–90 days before expected signing.

Subscription lines accelerate closing but create NAV and disclosure complexity. LPACs scrutinise line usage, interest drag, and alignment with hold strategy. Disclose line terms in PPM and quarterly reports — 8–12% of mid-market infra GPs in our peer set use lines; LPAC pushback rises when draws fund fees rather than assets.

Equalisation interacts with line interest allocation between early and late closes. Document it before the anchor signs.

Illiquid infrastructure requires board-approved valuation policies: DCF vs comparables vs cost, third-party valuation frequency, LPAC consultation triggers on material NAV moves. Independent valuation for assets above concentration thresholds — or each reporting date for newer managers — reduces disputes.

Stale valuations during subscription line draws trigger regulatory scrutiny under AIFMD and LP redemption questions even in closed-end structures with limited liquidity.

German institutional LPs often require detailed BaFin notification context for foreign AIF investments. Luxembourg-domiciled GPs marketing into Germany should prepare a standard BaFin briefing pack reusable across DDQs.

Depositaries verify asset ownership, monitor cash flows, and perform non-delegable oversight — operational failure delays draws. Administrators drive capital call timing, LP reporting, and Annex IV accuracy. Institutional DDQs expect named depositary and administrator with business continuity plans at first close, not "to be appointed."

Key person provisions should identify named partners and acceptable absence periods before anchors sign side letters. GP commitment sourcing — personal vs sponsor balance sheet — affects alignment perception; 1–5% GP commit is market, but source matters to pensions.

European institutional LPs scrutinise fee stacking: management fees during investment and harvest periods, transaction and monitoring fees at portfolio asset level, director fees, and broken-deal cost allocation. Carried interest waterfalls with preferred return, catch-up, clawback, and GP commitment must align with ILPA reporting expectations.

Carried interest tax treatment varies across EU member states — PPM risk factors should disclose GP tax reform exposure. Fee transparency letters alongside side letters reduce LPAC friction at quarterly meetings. We have seen transaction fees at portfolio companies erode net LP returns by 80–120bps annually when not disclosed consistently in quarterly packs.

Management fee step-downs at harvest should be explicit in the LPA, not negotiated ad hoc when deployment slows. Preferred return hurdles in the 6–8% range remain common for European infra; catch-up mechanics deserve scrutiny in LPAC review because small definitional differences compound over fund life.

First-time infrastructure GPs in Europe should sequence: regulatory authorisation or AIFMD registration, service provider appointments, draft LPA/PPM, LPAC charter, valuation policy, and only then pre-marketing. Reversing the sequence produces side letters incompatible with unsigned LPAs — a common mid-market mistake we correct on restructuring mandates.

Pre-marketing under AIFMD requires careful interaction logs and jurisdiction-specific filings. Compliance teams should review investor meetings weekly during fundraise. German institutional LPs often require SFDR and taxonomy questionnaires in DDQ — prepare standardised responses and evidence packs (sample portfolio ESG reporting, PAI methodology) before anchor meetings.

Realisations, carry crystallisation, clawback reserves, and continuation fund policies should be LPAC-approved before first realisation, not when a single-asset sale creates conflict. European LPs scrutinise fairness when GPs sell assets to continuation vehicles they manage.

Clawback escrow and key person insurance are not exotic — they are table stakes for institutional re-ups in 2026. Continuation fund policies approved by LPAC before first realisation reduce secondary-market signalling risk when LPs evaluate successor fund commitments.

Governance design is a fundraising differentiator. LPAC powers must match LP expectations. Side-letter discipline is operational risk management. Valuation and fee transparency prevent disputes that damage successor fund momentum.

If a GP cannot walk you through domicile rationale, MFN registry workflow, and valuation policy in the first meeting, the second meeting rarely improves the answers.

We welcome conversation on specific programmes. Track record still matters — but structure and policy alignment increasingly determine who reaches final close in this rate environment.

What is typical first close size for mid-market infra funds? Institutional credibility often begins at €200M+ hard commitments depending on strategy — the €410M programme cited above cleared €240M on first close. Do all EU LPs require SFDR disclosures? Most institutional LPs embed SFDR and taxonomy questions in DDQ now. When should depositary and administrator be appointed? Before regulatory application or immediately upon authorisation — LP DDQs expect named providers at first close, not placeholders.

German KVG-managed structures remain attractive for DACH LPs but require clear explanation of Luxembourg or Irish master-feeder stacking in PPM risk factors. GP commitment sourcing — personal vs sponsor balance sheet — affects LP confidence on alignment. We have seen anchors defer signing over ambiguous key person definitions until named partners and absence periods were fixed in the LPA.

Sincerely,
Michael Hartung
Senior Advisor, Fund Structuring

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Disclaimer: Commentary only. This article reflects observed market practice and advisory experience from Consultinghouse GWB; it is not legal, tax, or investment advice. Readers should obtain independent professional counsel before acting on any structure described.