How to Track Broken Deal Expenses in a PE or VC Fund

How to track broken deal expenses is a per-deal ledger you open when a pursuit dies, not a debate about whether abort costs are normal. One row per aborted deal: period, deal name or code from the notice, expense types billed, amount charged to the fund, amount the GP or management company absorbed, the LPA clause authorizing the charge, and whether a later related close recoups it. Raziel's LP fee and carry tracking page is the fee and carry line across a fund. Raziel's management fee offset tracking page is fee income flowing back as an offset. This page is the abort cost row.

This is not legal, tax, accounting, or investment advice. Raziel does not provide it. Copy the expense clause from your signed LPA and the amounts from the capital call notice or quarterly report. Do not assume a market share of abort costs sits with the GP.

What the row is (and is not)

ILPA Principles 3.0 (June 2019) puts broken deals under "Expenses Shared Between the GP and the Partnership," and says the specific circumstances and "the LPA's treatment thereof" should determine how they are shared. Its recommendation: "Broken deal expenses should be charged to the fund." Where special purpose, co-investment, or parallel vehicles participated, ILPA says in most cases it is appropriate to share those expenses across them with the fund pro rata. ILPA also draws a line: preliminary due diligence and sourcing costs, including related travel, should not be considered broken deal expenses. That is a recommendation, not your LPA.

The ILPA Model Limited Partnership Agreement (whole-of-fund waterfall, last updated July 2020) shows the clause form. Its partnership expense list reaches potential Portfolio Investments "(including broken deal expenses to the extent not borne by potential co-investors)," with travel, meals, and lodging, "but not including entertainment expenses or the costs of private air travel." Model wording only. Your executed LPA controls.

Columns to log when the pursuit dies

One row per aborted pursuit, per fund.

• Period. The quarter or month the expense hit, matched to the notice or report that carried it.

• Deal name or code from the notice. Use the identifier the notice or invoice uses. Do not write in a target name the fund never named.

• Expense types billed. Legal, accounting, consultants, travel. ILPA's Reporting Template defines the Broken Deals partnership expense as costs "clearly linked to the due diligence of specific investment opportunities including legal, travel and other costs," limited to unconsummated deals, excluding management fees and sourcing costs.

• Amount charged to the fund. The figure printed on the notice, not your estimate.

• Amount borne by GP or management company. Whatever was absorbed outside the fund, plus any share pushed to co-investment or parallel vehicles. ILPA says LPs should be told of any parallel co-investment vehicle not allocated a pro rata share.

• LPA authority cite. Section number and quoted phrase from your signed LPA. Goodwin (alert dated May 30, 2023, on ILPA's continuation fund guidance): if there is a broken deal, the allocation should conform with the provisions of the LPA.

• Whether a later close of a related deal recoups the abort cost. Leave it open until you know, then record the offset and the period it landed in.

Fund or GP is an LPA question, not a default

Per the Harvard Law School Forum on Corporate Governance (August 22, 2015, based on an Arnold & Porter memorandum by Veronica Rendon Callahan), the LPA for KKR's largest private equity fund required that fund to pay "all" broken deal expenses "incurred by or on behalf of" the fund "in developing, negotiating and structuring prospective or potential [i]nvestments that are not ultimately made." The SEC's objection was not that clause. As that post describes it, the SEC emphasized that neither the LPA nor the offering materials disclosed that KKR did not allocate broken deal expenses to co-investors that participated in and benefited from KKR's sourcing. The post states the SEC charged KKR on June 29, 2015 over more than $17 million misallocated, that KKR paid nearly $30 million to settle, and that KKR had no written expense allocation policy until 2011. Log two things per row: the clause that lets the charge through, and who was left out of it.

Where the number appears in LP reporting

ILPA's Reporting Template v. 2.0 Suggested Guidance (January 2025) gives GPs two acceptable methods: capture broken deal costs in the template's Broken Deals partnership expense field, or assign them to the specific line items the fees and expenses represent and footnote that choice. Because either is acceptable, your row will not always match one cell. Record the method used. Principles 3.0 also lists "detailed fund expenses including payments to affiliates, broken deal, administrative, etc. and offsets" among suggested LPAC agenda items.

Recoupment closes the row

Two ILPA mechanics make that column real. Principles 3.0: any reverse termination fees collected by the fund should be used to reimburse LPs to offset previously incurred broken deal expenses. The Reporting Template definitions add a Broken Deal Fee Offset line for termination fees received from counterparties of the fund's unconsummated deals, typically netted, subject to the LPA and offering documents, against unreimbursed termination fees paid to counterparties. A workbook holds this if each aborted deal is its own row, the LPA cite is quoted rather than paraphrased, and the GP-borne amount comes from the notice. It fails when abort costs are netted into one expenses line and you cannot say which pursuit they came from. Raziel's investment tracking products are the book those notices sit on. Copy the notice. Cite the clause. Log what the GP absorbed.