The principal-agent problem at the heart of PE/VC is older than the asset class. The LP gives money to the GP to invest on their behalf, knowing the GP has more information, more expertise, and entirely different risk preferences. Every term in an LPA is, in some way, a response to this problem.
The conflict, named
GPs and LPs share an interest in maximising the fund's net return. They differ in almost everything else. GPs prefer larger funds (more fees), longer fund lives (more management fee periods), looser restrictions (more strategic flexibility), and softer reporting (less embarrassment). LPs prefer the opposite of each. The LPA is where this is negotiated.
The ILPA Principles
The Institutional Limited Partners Association published the first ILPA Principles in 2009 and updated them through Version 3.0 (2019). The Principles set norms for fee transparency, GP-LP alignment, and governance. They are not law, but they are the dominant LP-side benchmark — a fund whose terms diverge meaningfully from ILPA must explain why.
ILPA also publishes standard reporting and fee templates (the ILPA Reporting Template, the Quarterly Capital Call and Distribution Notice templates). Adoption is widespread among institutional LPs.
The three alignment levers
Carry structure: a European waterfall with a 1x-and-hurdle preferred return aligns GP economics with LP economics in a way an American deal-by-deal waterfall does not. GP commit: a 5%+ GP commit means a partner's personal balance sheet rides the same returns as the LPs'. Removal rights: a 75% no-fault removal threshold is rarely invoked but creates an out-of-the-money option that disciplines GP behaviour.
Trust as the binding glue
Even with the best LPA, fund governance ultimately depends on multi-decade relationships between named individuals. LPs allocate to GPs they have re-upped with for three or four vintages; GPs raise larger funds because the same anchor LPs come back. The negotiated terms set the floor; the relationship sets the ceiling.