Excuse and Exclude Rights: When an LP Skips One Deal

Excuse and exclude rights let a limited partner skip a single portfolio investment without leaving the fund. Excuse is the LP's opt-out, usually a written policy or statute. Exclude is the GP keeping that LP out of one deal. Most deal-by-deal SPVs never write either right.

This is general information, not legal, tax, or investment advice. The limited partnership agreement and any side letter control. Confirm both with counsel.

Excuse vs exclude

The two words travel together in term sheets and then get used as if they were one clause. They are not.

Excuse. The limited partner elects not to fund a particular investment. The trigger is almost always something the LP brought to the GP in writing at subscription: a statute, a regulator, an investment policy, an ESG restriction, or an ERISA constraint. The LP delivers a notice after the deal is identified — often after the capital-call notice — and the GP then sizes the call without that LP's share.

Exclude. The general partner keeps a named LP out of a particular investment. The trigger is on the fund's side: the LP's participation would block the close, create a material filing or tax problem, impose an extraordinary expense, or raise a regulatory issue for the partnership or the portfolio company. The GP, not the LP, makes the call.

Neither right is a withdrawal. The LP stays in the partnership, keeps unfunded commitment for other deals, and stays on the waterfall for everything it did fund. Sitting out one name is not a transfer and it is not a default.

Why LPs ask for excuse rights

Institutional LPs arrive with lists. A public pension cannot own tobacco, or firearms, or a company on a state restricted-securities list. A bank or insurance company has a statute that bars a class of issuer. An ERISA plan has prohibited-transaction and plan-asset rules that make certain issuers, or a certain concentration of benefit-plan capital, a problem for that LP even if they are fine for everyone else.

On plan assets specifically: DOL's plan-asset regulation says that when a plan buys an equity interest in an entity that is not a publicly offered security and not a registered investment company, the plan's assets generally include an undivided interest in the entity's underlying assets unless the entity is an operating company or benefit-plan participation is not "significant." "Significant" is 25 percent or more of the value of any class of equity, measured after the most recent acquisition, disregarding interests held by the manager and certain affiliates (29 CFR § 2510.3-101, Cornell LII text of the DOL rule, accessed 26 August 2026). Excuse is one tool an ERISA LP uses so a single deal does not push it — or the fund — into a look-through it did not underwrite. That is a description of the regulation, not advice on whether any fund is a VCOC or under the 25 percent line.

ESG and values-based lists sit in the same mechanics even when no statute is involved. The LP attaches the policy as an exhibit, or describes it in a side letter, and the GP agrees to honor a reasonable determination that a named investment would breach it.

The GP's job at intake is to make the trigger objective. A named statute, a dated restricted list, or a policy delivered before first close is usable. A vague "we may sit out anything that does not fit our values" is a veto on the investment period. Most GPs will not sign that.

How exclude rights work

Exclude is the GP's safety valve. A university endowment sitting in the fund can be a problem for a deal that needs a clean cap table, a government contractor, or a buyer who cannot take certain tax-exempt LPs. A non-U.S. LP can create a filing the company will not wait for. An LP over a concentration cap can turn a routine close into a waiver process.

Model LPA language — used here as drafting background, not as a rule — typically lets the GP exclude an LP when that LP's participation would prevent the fund from consummating the investment, materially increase the risk or difficulty of the close, impose a material filing, tax, or regulatory burden, or cause the fund to incur a material extraordinary expense. The GP then calls capital from everyone else.

Exclude is not a way to keep a difficult LP off a winner and on a loser. If the GP is picking and choosing for economics rather than close risk, that is a conflict. Conflicts of that kind are the reason funds have an LPAC. SEC exam staff have cited advisers that did not take conflicts to the LPAC the way their own LPAs, PPMs, and side letters promised, or that obtained consent after the trade or on incomplete information (SEC Division of Examinations, Observations from Examinations of Private Fund Advisers, 27 January 2022). If you write an exclude right, use it for the close, and document why.

What happens to the rest of the fund

Someone still has to buy the stock. When an LP is excused or excluded, that LP's slice of the deal is reallocated.

Common mechanics, all of them LPA-defined:

• Pro rata among remaining LPs. The default. Remaining partners take a larger percentage of that one investment. Their unfunded commitment drops faster. Concentration in that name goes up for everyone who stayed in.

• GP or affiliate fill. Sometimes permitted, sometimes a conflict. If the GP takes the hole, take it to the LPAC before you sign.

• Co-investment SPV. The overflow, or the excused LP's desired extra, goes into a sidecar. That is a second issuer with its own offering and its own Form D. See co-investment SPVs alongside a venture fund.

• Shrink the check. The fund buys less. The company may not accept that.

Expenses split two ways. Deal expenses on the skipped investment usually follow the people who own it. Fund-level expenses — audit, admin, management fee on commitments — usually continue to hit the excused LP, because that LP is still a partner. The LPA has to say so. Do not assume "excused from the deal" means "excused from the year's fee."

Subsequent closings and equalization are a separate problem. An LP admitted after the deal has already closed does not automatically inherit an excuse that applied to someone else. Late closers equalize into the portfolio the fund actually bought.

Recycling and remaining commitment also move. An excused amount is typically not treated as funded. It stays in unfunded commitment and can be called for the next deal, unless the LPA treats the excuse as a permanent reduction. Read that sentence in your own agreement before you tell an LP their "dry powder" went down.

Notice, consent, and the LPAC

Excuse is useless if the LP hears about the company after the wire is due. Competent drafting gives the LP a short window after the deal is identified — model term sheets often use a handful of business days after the drawdown notice — to deliver a written determination. The GP then recalculates the call. The admin has to stop the original notice or issue a revised one. A late excuse after money has already moved is a refund-and-reallocation problem, not a clean skip.

Exclude notice runs the other way: the GP tells the LP it is out, with the reason the LPA requires.

Who consents:

• Excuse. Usually self-executing if the trigger matches the side letter or LPA. Some drafts let the GP challenge a determination that is not reasonable or not within the written policy.

• Exclude. GP determination under the LPA. Some drafts require LPAC notice when the exclusion is material or when the GP or an affiliate will take the hole.

• A standing restricted list. Often disclosed at subscription and updated. The GP screens deals against it before the call goes out, so the LP never has to excuse.

Most-favored-nation clauses commonly carve excuse rights out of automatic election. The point of an excuse is that it is personal to that LP's statute or policy. Letting every other LP elect into it turns a compliance carve-out into a menu. If you grant excuse in a side letter, say whether MFN applies.

Why SPVs usually skip excuse and exclude rights

A committed fund has an investment period, a portfolio, and LPs who cannot own every name the GP will see. Excuse and exclude exist for that vehicle.

A single-asset SPV has one purchase agreement and one issuer. The investor who cannot own that issuer should not subscribe. Putting an excuse right in an SPV operating agreement is asking for a hole in a vehicle that has no other deal to fill it. If an LP cannot sit in the main fund on a particular name, the usual alternative is a co-investment SPV for the people who can, or a smaller fund check — not an excuse clause inside a one-asset LLC.

The exception is an SPV used as a continuation or a multi-asset warehouse. Those start to look like funds. Then the LPA (or a long operating agreement) can borrow the same excuse and exclude mechanics. Most syndicate SPVs should not.

What is the difference between an excuse right and an exclude right?

Excuse is the LP opting out of one investment under a written policy or statute. Exclude is the GP keeping that LP out of one investment because the LP's participation would break or burden the close. Both leave the LP in the fund for everything else.

Do excuse and exclude rights change the LP's commitment?

Only for that deal, and only as the LPA writes it. The excused or excluded amount is usually not treated as funded. Unfunded commitment remains available for later calls unless the agreement permanently reduces it. Fund-level fees and expenses typically continue.

Do deal-by-deal SPVs use excuse and exclude rights?

Rarely. A single-asset vehicle has nothing to reallocate into. An LP who cannot own the company should not join the SPV. Use a sidecar or a smaller fund check instead.

This article is for informational purposes only and is not legal, tax, or investment advice. Excuse, exclude, ERISA, and plan-asset outcomes depend on your documents and facts. Confirm with qualified counsel.