#24 Episode - The Ultimate Guide to Fund Terms
Mastering LPA Terms with Examples & Explanations—Plus an Updated Term Sheet!
Key Takeaways: What are the key terms of a venture fund? Can you explain them in plain language? What are some examples? Do you have a term sheet? (Yes, read to the end)
Key Terms: Advisory Committee • Capital Commitments • Carried Interest • Clawback • Conflicts of Interest • Fund Size • Fund Expenses • Hurdle • Key Person • Management Fees • Recycling • Side Letters • Suspension & Removal • Time and Attention • Valuation Policy • Warehousing • Waterfall
The Two-Sided Nature of Venture Capital
Venture capital has essentially two sides to it: Venture deals and venture funds.
The term “venture deals” refers to investments in startups, while “venture funds” refers to investments in funds. Both startups and funds share two sides of the same coin:
Much has been written about startups, but not as much about fund law.
This Substack aims to fill that gap, starting with the key fund terms.
What are the Key Terms of a Venture Fund?
My recommended starting guide for new fund managers is The Business of Venture Capital: The Art of Raising a Fund, Structuring Investments, Portfolio Management, and Exits by Mahendra Ramsinghani.1
The Business of Venture Capital is a great practical guide, particularly for first-time fund managers. It includes the essential terms of fund formation.
For example, this exhibit highlights the most common terms negotiated between limited partners and general partners in a limited partnership agreement:2
Another exhibit in the book illustrates the key terms of a venture fund:
Although these exhibits are good places to start, the primary source of the first exhibit appears to be based on an MBA survey taken in 2011, which is not currently available for download.3 That said, the legal concepts are sound and still applicable today.
Mastering The Key Fund Terms
Here’s a list of 10 key fund terms for emerging fund managers raising capital:
Advisory Committee (LPAC)
Capital Commitments
Carry
Clawbacks
Fund Expenses
Fund Size
Key Person
Management Fees
Side Letters
Waterfall
Let’s define each term starting at the top, in alphabetical order:
1. Advisory Committee (LPAC)
Definition: A group of three or more members selected by the General Partner to independently review and approve certain fund transactions and matters.
Explanation: The members of a Limited Partnership Advisory Committee (LPAC) are typically made up of limited partners (LPs), who serve voluntarily. The purpose of an LPAC is to provide guidance and oversight in three key areas:4
Conflicts of Interest: The LPAC may examine valuation methodology, firm policies and “principal transactions” to confirm GP and LP alignment.
Waivers of Restrictions: The LPAC may hold the authority to waive certain investment limitations in the partnership agreement (LPA), which allows the GP to manage the fund more effectively. This includes the ability to make non-standard investments, bypass investment caps and extend the term of the fund.
General Oversight: The committee can seek additional financial reporting, audits, provide information on defaults, non-standard fees and expenses, potential legal disputes and other significant events. LPAC members do not act as agents for the fund or serve as fiduciaries, but rather they promote transparency, governance and alignment of interests between the GP and LPs.
Example: During the closing process, the GP may wish to transfer “warehoused” assets into the fund—however, the law requires disclosure and consent prior to the transfer of such assets into the fund. An LPAC or Advisory Committee helps with that disclosure and consent process on behalf of the LPs.
2. Capital Commitments
Definition: The total amount of money that an investor agrees to fund.
Explanation: There are three key areas about capital commitments:
Timing
Minimums
GP Commits
Timing: LPs generally invest in funds in one of two ways:
100% Upfront: All of an LP’s capital commitment may be required upon subscribing to the fund, just as startups would expect their investors to do.
Commit Now, Pay Later: But the far more common approach is for an LP to pledge their support to the fund and then make capital contributions over time. LPs wait to fund their investment until the GP has “drawn down” or “called” for their money through one or more “capital calls” or written notices.
Example: Capital Call notices might include the following information:
• Capital Commitment: $500,000 (100%)
• Capital Contributions to Date: $350,000 (70%)
• Remaining Commitment: $150,000 (30%)
• Capital Call Due by: February 14, 2013
(Plus, the fund’s wire instructions)
Minimums: Fund investors are often required to commit to a certain minimum investment amount.
Example:
• Institutions/Entities: $1,000,000 minimum commitment
• Individuals: $500,000 minimum commitment
GP Commit: The GP is expected to contribute money to the fund (“GP Commit”). The historical industry standard for the GP Commit is 1%, but that standard is being revaluated, particularly in light of calls for more diversity in emerging fund managers.5 For example, Courtney McCrea & Sara Zulkosky, co-founders and managing partners at Recast Capital, concluded that:
“The standard 1% GP commit is arbitrary at best—and creates significant barriers to progress—at worst.”6
3. Carry
Definition: A percentage of profits earned by the General Partner that is separate from the management fees.
Explanation: Everyone knows the market standard rate for carry is 20%. Some firms charge a flat premium carry. But many emerging funds also use a performance hurdle to charge 25-30%. Carry is intended to incentivize GPs as “performance-based compensation.” In other words, carry is the GP’s profit share.
Example: Let’s look at a hypothetical fund named Emerging Ventures.
Emerging Ventures closes a $100 million fund. The carry is set at 20% but increases to 30% once the fund “returns 3x or more” (Distributed to Paid-In Capital, or DPI). The fund returns $320 million in net profits, after paying expenses and management fees, but before investors are paid back.
How much carry is the GP of Emerging Ventures entitled to?
If the fund’s net profits are $320 million, the first $100 million is distributed to the investors and the remaining profit is split depending on whether the premium hurdle is triggered.
With $220 million left, LPs would be distributed $176 million ($220 million * 0.80) and the GP would be distributed $44 million ($220 million * 0.20). Since $276 million in distributions is 2.76x—less than 3x DPI—the GP carry is 20%.
In sum, the GP of Emerging Ventures would be entitled to 20% of the profits—or $44 million—after management fees and expenses have been accounted for.Why do they call it “carry” or “carried interest”?
Merchant Ships and the Venetian Navy in Port of Venice (Wikipedia) The origin story of carried interest supposedly dates back to the Middle Ages. During the Renaissance, merchants transporting “carried goods” needed a way to incentivize sailors to set sail and return with the goods back to home port. For example, Venetian ship owners would send empty ships to Constantinople to load spices and silk from the far east. Crew members faced months-long journeys with risks of disease, pirate attacks, mutiny and shipwrecks from bad weather. For those risks, and to align incentives, the crew was rewarded with a share of the profits. The split was 20%. And even if this historical account is not entirely accurate, it serves as a useful reference to compare the concept of carry today.
4. Clawbacks
Definition: Clawbacks are generally a General Partner’s obligation to return excess carry back to the fund.
Explanation: Clawbacks are in reference to the GP’s obligation to return carry to the LPs because the GP received more carry than is allowed in the LPA. In other words, in situations where the GP receives funds before carry is “in the money.”
Key Concepts: Clawbacks are found when: (1) a “hurdle” exists (2) expenses or liabilities are greater in later years, and/or (3) the fund distributes carry on a per deal basis rather than on the fund as a whole basis (see “Waterfall,” at the bottom).
Hurdle (Preferred Return): A hurdle is a fixed minimum rate of return that must be reached before the GP earns carry. The range of hurdle rates is between 6% to 8%, but most US venture capital funds do not use hurdles (but ~33% still do).7
Fund Expenses: A fund can incur greater expenses in the later years of the fund, such as increased legal, audit and accounting fees, which can lead to a decrease in the overall profitability of the fund and could result in the general partner receiving distributions in excess of their allocated carried interest %.
Deal-by-Deal Carry: Let's assume in a deal-by-deal carry waterfall (in which the GP initially receives carry at the same time as LPs), the GP is entitled to 20% carry on $50 million in profits from a $100 million fund. However, if the fund experiences a slowdown and doesn't achieve its expected profit returns, the GP's $10 million carry distribution may be recalled. This means that the GP’s receipt of carry is conditional and fully realized only if the fund returns 1.5x+ ($100m + [40m/80%]) = $150m or more.8
A problem with clawbacks is enforcing them. In the past, an escrow account would be setup to hold back funds. Today, GPs just promise to give the money back, take it out of their management fees, or sign some form of personal guarantee. None of these options are ideal, which is why many funds put up guardrails to delay paying carry until they are “in the money.”
5. Fund Expenses
Definition: Fund expenses are costs associated with the operation and maintenance of a fund, such as legal fees, accounting fees, and other admin costs.
Explanation: Fund expenses are typically separated into two categories: Organizational Costs (often subject to a Cap) and Operating Expenses (uncapped). These expenses are directly paid by the fund’s investors through their capital contributions.
Key Concepts: Organizational Costs, Placement Fees & Fund Expenses
Organizational Costs: A cap on organizational costs refers to a limit set on the amount of fees, costs and expenses that the fund will pay for the formation and organization of the fund. Any expenses that exceed that cap will be covered by the GP, and sometimes through a management fee offset.
Placement Fees: Fees paid to placement agents—such as third party brokers to market and raise capital for the fund—are typically paid by the GP, sometimes through a management fee offset
Fund Expenses: The core out-of-pocket costs incurred in forming and maintaining the fund such as:
audit fees
bank fees, custodial costs
cost of liability and other insurance premiums
costs associated with Advisory Committee meetings
professional fees including legal, accounting, bookkeeping
filing fees, securities disclosure expenses, compliance costs
costs and expenses associated with any transfer or sale of interests
partnership taxes, franchise fees and tax costs and expenses, including tax penalties, assessed at the level of the partnership
all other reasonable fees and costs that are normal operating fund expenses
6. Fund Size
Definition: Fund size is the total amount of money raised from fund investors.
Key Concepts:
Targets, Caps, Minimums, and Portfolio Construction
Target: A fund’s target fund size is the amount of money a GP is looking to raise in the “investment deck”9 and in their term sheet, if available. However, the fund size is not just the amount raised for investment in startups. That might be called the investable capital.
Caps: A fund’s cap is the maximum amount of money it can raise. This is important to ensure the fund is sized appropriately with regards to the capital needs of its portfolio companies.
Minimums: A fund’s minimum is the lower limit of capital it needs to operate. This amount is less than the target fund size and usually reflects the needs of the LPs’ risk profile, not necessarily the capital needs of the GPs.
Portfolio Construction: An industry term meaning the math and logic behind modeling a fund structure. A fund’s size contributes to its portfolio construction, as the saying goes, “your fund size is your strategy.”10
Which fund size is appropriate? Relevant factors include:
the number and type of investment targets
the “check size” of each of those investments
reserve amounts for follow-on opportunities (pro rata)
the number of people working at the firm, including other GPs and partners
management fees needed to sustain a full-time commitment11
Fund size is not a good predictor of returns. Only the top 20% of all funds achieve 3x or greater returns—and on a net basis, that pool shrinks even further.
“There has been this narrative about investing in VC funds that you have to get into the top quartile (25%) or possibly the top decile (10%) in order to generate good returns.” —Fred Wilson, @AVC12
So why is 3x and the top quartile % the most talked about VC return profiles? Shouldn’t the benchmark for performance be based on alternative investment scenarios, where limited partners have equal opportunities to earn a return?
A study published in 2020 found that half of all venture capital (VC) funds outperform the stock market (the “PME” or “public market equivalent,” which is the benchmark most institutions measure VC funds against).13
This study was conducted by the National Bureau of Economic Research (NBER) with leading economists (including Steven Kaplan at the University of Chicago), based on a sample of hundreds of venture capital funds from 2009 to 2017.
Another study based on the same data source shows return multiple profiles for venture funds by size from 1978 to 2019:14
The return profile for venture funds of all sizes are similar, except in the full data set, only a small fraction of funds (0.1%) have multiple returns greater than 20-40x and they are found exclusively in box 4 (top right).
Emerging funds have a higher percentage of outsized returns, but larger growth funds deliver more consistent returns (for example, median returns of 1.86x for fund sizes $500m+ vs. 1.67x for funds under $250m).
In other words, emerging funds have a higher slugging percentage, while growth stage funds have a higher batting average.
“Your fund size is your strategy.” —Mike Maples Jr.
7. Key Person
Definition: A key person is an individual or group of individuals who hold primary responsibility for the success or failure of a fund.
Explanation: A “key person clause” is a contract provision found in most fund’s limited partnership agreements (LPA) that identifies the people “too important to fail” if they are no longer providing services to the fund. These terms are often used for funds with a single or dual GP or a fund in which its strategy hinges on one or more essential persons on the team.
Key Concepts:
Time Commitment, No-Fault Trigger, For Cause, Successor Funds, Suspension, Removal and Termination
Time Commitment Test: The amount of time that key persons devotes to a fund varies greatly. Importantly, there are two relevant time periods for this test: During the active investment period and after the end of the investment period. Traditionally, this has been around three to five years, but the important point is GPs are generally expected to commit to less time in maintenance mode versus actively investing in companies. To make the rules clearer, a provision called “Devotion of Time” or similar may specify the minimum expected time commitment of the GP:
All of business time
Substantially all of business time [as is reasonably necessary]
Substantial majority of business time
Such time deemed “necessary to manage the affairs of the Fund.”
No-Fault Trigger: A related concept is a no-fault suspension or termination of the fund:
The Institutional Limited Partners Association (ILPA) recommends that a vote of two-thirds in interest (66.67%) of the investors is required to suspend or terminate the investment period and a vote of three-quarters in interest (75%) of the investors is required to remove the general partner or dissolve the fund without cause.
For Cause Events:
Cause for removing a GP typically includes bad actions, such as fraud or gross negligence, rather than just poor performance. These actions, known as “for cause trigger events,” must be clearly listed in the LPA:
Fraud
Misconduct
Gross negligence
Breach of fiduciary duties
Criminal Conviction
Bankruptcy
Successor Funds: After the fund is substantially invested, the time commitment test can be reduced or removed. Different thresholds may apply but generally if at least 70%-85% of the fund’s committed capital has been invested, committed or reserved for working capital purposes, the GP may reduce its role in managing the fund and start raising a new one.
Suspension: If a GP violates the time or cause provisions above, one remedy is to suspend the investment period. The investment period is the time when the General Partner can make investments and it usually lasts for three to five years. When the investment period is suspended, the GP can no longer acquire new investments or call fees, but they can fund follow-on investments, expenses for existing portfolio companies, or investments that were in progress at the time of suspension.
Removal and Termination: An extreme remedy is a replacement of a Key Person or removal of the GP by vote. For Cause events, where at least a majority of interest of the LPs consent, and No Cause events, based on a supermajority threshold (e.g., 75%—see No-Fault Trigger).
8. Management Fee
Definition: A management fee is a fee charged to investors on a regular basis for the operation and maintenance of a fund.
Explanation: The management fee is a fixed percentage charged by the fund’s management team for the services they provide. It is often issued to an affiliated “management company” for liability and tax purposes. Here are three key features:
Amount: For venture funds, the management fee is based on a percentage of capital committed to the fund by an investor and ranges from 2% - 2.5% per year. However, some emerging fund managers may “front-load” their fees and ask for more upfront but reduce fees in later years by a certain amount.
Timing: The fee is charged on a quarterly (or other periodic) basis, and is paid out of the LP’s capital contributions every year the fund is in operation.
Step-Downs: After a certain period of time passes (typically, 5 years), the management fee may reduced, within a range of 0.50% to 1.50% per year.
Key Concepts:
Cashless Contributions, Subscription Lines, Note, Fund Expenses
Cashless Contributions: Contributions can be made by the GP either in cash or through a process called “cashless contributions.” With cashless contributions, the GP can reduce the amount they are otherwise required to contribute by up to 100%, which results an equal reduction of the management fee. This can be adjusted each year. The GP will be treated as if they had made the full GP contribution for all other purposes except for tax purposes (this arrangement raises important tax issues, please speak to a tax specialist about this).
Subscription Lines: An alternative to cashless contributions is a loan from the bank to pay for the GP Commit by leveraging future management fees.
Promissory Note: An alternative to an outside line of credit is issuing a (full recourse) promissory note or loan from the fund to cover a portion of the GP Commit, such as 25% in cash and 75% through a note—provided it bears a sufficiently minimum federal interest rate necessary to avoid imputed interest.
Fund Expenses: Management fees and fund expenses refer to different things. The management fee is used to cover management services, office salaries, and other GP expenses that are not charged directly to the fund. Fund expenses involve forming the fund and associated entities, legal costs, accounting hosting annual meeting for LPAC members, fund administration services and other miscellaneous expenses associated with conducting investment work and fund related work.
What's the key difference between fund expenses and management fees?
Management fees cover the management team’s services and non-reimbursable expenses while fund expenses cover the day-to-day operations of a fund.
How can you make enough to support your fund full-time? Use a minimum fee:
Example: “The GP will receive a management fee calculated at an annual rate equal to 2.50% of the committed capital of the Fund, and the minimum annual management fee will be [e.g., $150,000] through the 5-year investment period.”
Loans: Management fees are like loans. But there is no such thing as a free lunch. Many fund managers don’t realize that management fees have to paid back to the LPs before carry goes to the GP (see “Waterfall,” at the bottom):
Management fees are essentially zero-interest, non-recourse loans to the GP. It's obvious, but I find so many LPs that don't view as suchExample: A $100 million fund that charges a 2% management fee over a 10 year investment period will have $20 million allocated to the management fee, leaving $80 million to invest (not including fund expenses). This means if only 80% of the fund is being deployed, putting the venture capitalists at a disadvantage as they will need to return at least 1.25x to return the $100 million fund to their limited partners.
Recycling Management Fees: Another way to conceptualize this: Brad Feld says his venture fund, Foundry Group, will reinvest its management fees, which aligns more with investors, increases returns for everyone and results in tax advantages. This process is known as “recycling” management fees. In other words, rather than receiving a management fee, they reallocate 100% of the management fee to fund more investments:
Disclosures Please: But if you take 100% of the management fees upfront or recycle management fees, you must clearly disclose this and receive informed consent from your LPs—otherwise you could be in violation of securities laws:
9. Side Letters
Definition: A side letter is a separate agreement that outlines different terms for an investor’s investment in a fund.
Explanation: Institutional and large investors often ask for special rights through a side letter, which is just a short agreement that is negotiated with the investor’s fund documents. As Ramsinghani wrote in The Business of Venture Capital:
All LPs are equal, but some LPs are more equal than others. —Mahendra Ramsinghani15
Key Concepts: Co-Investment Rights, Reduced Fees, Information Rights and Confidentiality, Most Favored Nation
Co-Investment Rights: The GP may offer certain investors the right to participate in co-investment opportunities, which are the ability to invest alongside the GP on a deal-by-deal basis. This allows the LPs to have more flexibility over where their money is allocated and gain more insights into a portfolio company’s performance. However, it can also present challenges for the GP in terms of managing the timing and due diligence process, and ensuring that the LP's involvement does not negatively impact the exit potential of a portfolio company.
Reduced Fees: The GP may feel pressure to reduce or waive management fees or carry for LPs; however, it is generally a bad idea to offer investors a reduced fee or carry in the main fund because most large investors will negotiate a “most favored nation,” which means it’s not just giving one investor special rights, but all investors with side letters. However, GPs often reduce their carry in co-investments (10-15%), management fees are zero and expenses are often capped or a flat fee for special purpose vehicle (SPV) expenses.
Information Rights and Confidentiality: The General Partner may agree to provide an investor with greater informational rights, such as the ability to request a description of the exact positions of the fund at any given time, while at the same time agreeing to strict confidentiality provisions (such as no press releases using the LP’s name without their prior written consent); and
Most Favored Nation: This allows an investor to capture the best economics that the GP provides to any other investor. This clause is usually reserved for the largest or earliest investors.
10. Waterfall
Definition: A waterfall is the process and structure of sharing fund returns.
Explanation: A waterfall distribution method is a way of dividing up profits among the LPs and GP in a venture fund.
Key Concepts: There are two main types of waterfalls: Deal-by-Deal, Whole of Fund
Deal-by-deal: In this model, the fund’s profits are distributed after an exit of a portfolio occurs. GP clawbacks are often used in this model because taking carry early opens the possibility the GP does not reach its profit share at the fund level. However, to prevent clawbacks, a fair market value test might be applied before the fund has enough profit to distribute carry to the GP:
Example: Assuming the fair market value of the fund’s entire portfolio equals 125% or more, the GP can distribute carried interest to itself alongside investor distributions.
Whole of Fund: A whole-of-funds model is the industry norm and requires the GP to first return 100% of the investor’s principal investments before the GP takes any profits. Only after that has occurred, then will the profits be split between the LPs and GP according to a pre-determined formula (e.g., 80% of profits to LPs, 20% of profits to GP).
Distributions are made in the following amounts and order of priority:
First, 100% to all partners (including the GP) in proportion to their respective capital contributions until the partners have received cumulative distributions equal to the sum of their capital contributions.
Thereafter, the balance (a) 20% to the GP (the “carried interest distributions”) and (b) 80% to the LPs in proportion to their respective aggregate capital contributions
Further Analysis: The GP should never put themselves in a position that (a) leaves them exposed to return carry they did not earn, or (b) is tax disadvantageous.
On the first point, we discussed the effects of “Clawbacks,” above.
On the second point: The Securities and Exchange Commission (SEC) has suggested new rules that prevent GPs from reducing their clawback obligations by considering any taxes that may have applied to the GP, whether those taxes are actual, potential or hypothetical (as is often the case, the highest tax bracket is assumed).16 Those rules may go into effect soon. In addition, if carry is allocated before a three-year holding period has lapsed, the GP may also be paying ordinary income tax rates versus the long-term capital gain rates of carried interest.17
If you’re looking for additional reading content, I highly recommend reading Law of VC #14 Episode -LPA terms for Emerging Managers and download this term sheet:
If you've already subscribed, thank you so much—I appreciate it! 🙏
As always, if you'd like to drop me a note, you can email me at chris@harveyesq.com, reach me at my law firm’s website or find me on Twitter at @chrisharveyesq.
Thanks,
Chris Harvey
Mahendra Ramsinghani, The Business of Venture Capital: The Art of Raising a Fund, Structuring Investments, Portfolio Management, and Exits (3d ed. Wiley Finance 2021).
Limited Partners (“LPs”) are the investors in a fund, and General Partners (“GPs”) are the venture capitalists who are responsible for raising money from a network of passive investors, selecting portfolio investments, and overseeing the fund’s operations, accounting, and legal. GPs can also be referred to as the “fund adviser”, “investment adviser, “fund manager,” or the “managing director(s).” More on VC jargon and industry terms here:
See Colin Blaydon & Fred Wainwright, Limited Partnership Agreement Project: Results of GP and LP Survey (2011). (No longer available at) http://mba.tuck.dartmouth.edu/pecenter/research/pdfs/LPA_survey_summary.pdf (“In a survey conducted by the Center for Private Equity and Entrepreneurship at Dartmouth’s Tuck School of Business, ~100 GPs and LPs were asked to rank the most negotiated terms.”)
Note that an Advisory Committee is different from informal “advisory boards,” which are composed of experts in the fund's investment focus, who can provide advice and market insight to the general partner, often in exchange for a share of the fund's profits or an opportunity to invest in the fund on favorable terms.
Generally speaking, this refers to underrepresented minorities and women raising first time or early-stage funds (“Fund I, Fund II or Fund III”) with fund sizes $150 million and under. See Courtney McCrea & Sara Zulkosky, Commentary: Challenging the GP commit – one size doesn't fit all, Pensions & Investments (April 20, 2022).
See footnote #5, McCrea & Zulkosky on Challenging the GP Commit.
That is, once all distributions are made, the “DPI” equals the “TVPI” of a fund. See Moonfare Glossary - DPI (2023).
See Robert Harris, Tim Jenkinson, Steven Kaplan & Ruediger Stucke, “Has Persistence Persisted in Private Equity? Evidence from Buyout and Venture Capital Funds”, NBER (2020).
Both the NBER study and this data are provided by Burgiss, a platform in which over 1,000 LPs use to manage their transactional accounting and valuation history. The data are net of all fees and carried interest paid to the General Partner sampled from a wide array of investors including public and private pension plans, endowments and foundations, family offices, and others. The underlying cash flow data of the funds are highly likely to be accurate because LPs use Burgiss’ systems for record keeping and tracking payouts.
See footnote #1, The Business of Venture Capital (2021).
Tom Geraghty, Understanding the SEC’s proposal to prohibit after-tax clawbacks for private fund sponsors, DLA Piper (July 27, 2022).
IRS Tax Code Section 1061 requires a tax partner to wait three years before it can receive long-term capital gain treatment for recognized carried interests. The three-year rule applies in the following situation, if all criteria are true:
The interest is a “profits interest” and not a “capital interest” (in other words, it is carry and not an investment or GP commit)
The profits interest is issued in connection with the “performance of substantial services” by the taxpayer (or a related person) in certain specific trades or businesses
Specifically, the trade or business must consist of (1) “raising or returning capital” and (2) “investing, identifying, or developing specified assets including securities, commodities, real estate, cash or cash equivalents”; and
The trade or business must be conducted by the partnership on a regular, “continuous and substantial basis.”