Operations and vendors

Defaulting LP

Also called defaulting partner, capital call default.

Definition

A defaulting LP is a limited partner that fails to pay a capital call when due and, after any cure period the limited partnership agreement allows, becomes subject to the LPA's default remedies, which commonly include default interest, loss of voting and distribution rights, forfeiture of part of the capital account, a forced sale of the interest or exclusion from future investments.

Updated October 9, 2026Checked against our editorial standards

Example

An LP with a $5M commitment has funded $2M and its capital account stands at $2.1M after marks. A $500,000 call falls due on 15 March and is not paid. The LPA gives ten business days to cure, with default interest running from the due date. The LP does not cure. The GP applies the forfeiture remedy: half the capital account, $1.05M, is reallocated to the non-defaulting partners pro rata to their commitments, so an LP with $10M of the $50M in non-defaulting commitments picks up $210,000. The defaulting LP's remaining $1.05M interest is offered to the other LPs, and the GP covers the $500,000 shortfall by calling it from everyone else.

Confused with

Excused LP. A limited partner excused from a particular investment under the LPA or a side letter, usually for legal, regulatory or policy reasons. Excuse is agreed in advance and carries no penalty.

LP transfer. A voluntary sale of an interest with GP consent. A forced sale of a defaulting LP's interest is a remedy, on the GP's terms, with proceeds applied first to what the fund is owed.

In practice

Defaults are rare in normal years and rise when LPs are overcommitted or illiquid. The remedies are severe because they are meant to deter, and GPs usually have discretion over which to apply; a quiet negotiated transfer is the common outcome. A subscription line lender removes a defaulting LP from the borrowing base at once, which can tighten the fund's liquidity at the worst time.

Related terms

Capital callA capital call, also called a drawdown, is a notice from the general partner requiring each limited partner to wire a portion of their committed capital to the fund by a due date, usually ten business days, to fund investments, fees or expenses.
Capital accountA capital account is the running balance of a single partner's economic interest in a fund: contributions in, allocations of income, gains and losses, less distributions out.
Unfunded commitmentUnfunded commitment is the portion of a limited partner's capital commitment that the fund has not yet called, calculated as total commitment less contributions to date plus any distributions the LPA makes recallable, and represents the LP's remaining obligation to fund capital calls.
LP transfer (secondary)An LP transfer is the assignment of a limited partner's interest in a fund, including its capital account and remaining unfunded commitment, to another investor.