Broken Deal Expenses

Broken Deal Expenses are the costs a fund incurs in pursuing potential investments that fail to close. These include legal fees for term sheet negotiation and document drafting, technical due diligence consultant fees, travel costs for company visits, background check expenses, and other out-of-pocket costs. Whether these expenses are borne by the fund (and thus by LPs) or by the management company varies by LPA. Most institutional-quality LPAs specify that broken deal expenses are a fund expense, reducing investable capital. Some LPAs cap the total amount or require that broken deal expenses be offset against management fees. High broken deal expenses can signal an inefficient investment process, poor deal pipeline quality, or overly aggressive pursuit of competitive deals.