ILPA Tells Venture Funds: Stop Billing LPs for Formation Costs

On May 13, 2026, the Institutional Limited Partners Association published guidance that takes direct aim at one of venture capital's most entrenched norms: the practice of making limited partners pay fund formation legal fees without any say in who provides the counsel, what the budget is, or how costs are controlled. The ILPA, which represents pension funds, endowments, foundations, and other institutional LPs that collectively commit hundreds of billions of dollars to private funds each year, described the arrangement as "fundamentally misaligned." The guidance, summarized by law firm Cadwalader in a client note published May 15, lands at a moment when the LP-GP relationship is already under strain from every direction.

The fund formation legal-fee issue might sound like inside baseball. It is inside baseball. But it is inside baseball with real money attached. A typical venture fund formation, even for a modest $50 million vehicle, can run $150,000 to $400,000 in legal costs. For a $500 million fund, the tab routinely crosses seven figures. Under prevailing practice, those costs are charged to the fund itself, meaning LPs bear them through management fees and reduced net returns, while the GP selects the law firm. The ILPA is now pushing for GPs to absorb organizational expenses directly, or at minimum give LPs genuine input into the selection and budgeting process.

The guidance, as Seyfarth Shaw noted in its own breakdown on May 26, arrives amid a broader regulatory and market rethink of how private fund costs are structured. The Securities and Exchange Commission's private fund adviser rules, though partially struck down by the Fifth Circuit in 2024, put the industry on notice. The ILPA's organizational expense guidance is not a regulation; it carries no enforcement weight. But it signals where institutional LPs intend to draw lines in negotiation, and in a fundraising market where capital has grown more selective, those signals carry more weight than they did three years ago.

The 2026 venture fundraising market is not a monolith. At the top, brand-name platforms continue to close funds quickly and often oversubscribed. Just below that tier, the environment turns unforgiving. LPs are scrutinizing deployment pace, unrealized mark exposure, and, above all, distributions to paid-in capital. The industry shorthand is DPI, and for most funds raised between 2019 and 2022, the number remains stubbornly below 0.5x. When an LP's portfolio is sitting on a decade of uncrystallized carry, the question of who pays the legal bill on the next fund moves from footnote to negotiation point.

That selectivity is reshaping who gets to form a fund at all. In an April 16 analysis, Forbes contributor Ilona Limonta-Volkova reported that "LP patience is thinner, deployment timelines are under scrutiny, and capital is gravitating toward brand-name platforms with established DPI." The tourists have left, the piece argues, but a cohort of solo GPs who built track records during one of venture's most difficult environments are still attracting commitments. The ones closing are not generalists raising on vibes. They are operators who can point to specific portfolio companies, often in infrastructure, developer tools, or vertical AI, where they sourced a deal that a multi-GP fund would have competed for.

The solo GP dynamic illustrates how the LP calculus has fragmented. A family office or fund-of-funds writing a $500,000 check into a $10 million solo-GP vehicle is not worried about organizational expense line items; they are betting on a single individual's access and judgment. But the same LP, when facing a $25 million commitment to a $500 million fund, will spend weeks on the limited partnership agreement, the management company structure, and the fee waterfall. The ILPA guidance is written for the latter scenario, and it reflects a reality where institutional LPs are no longer content to be price-takers on the plumbing of the asset class.

The plumbing is getting disrupted from a different direction entirely. On May 6, TechCrunch reported that Robinhood's Ventures Fund I, a closed-end fund listed on the New York Stock Exchange that gives retail investors exposure to private companies like Stripe, Databricks, OpenAI, and Oura, had attracted more than 150,000 individual investors. CEO Vlad Tenev described the participation figure as validation of a model that many in traditional venture viewed with skepticism. The fund's shares, which debuted at $20, had more than doubled by mid-May, crossing a $1 billion market capitalization.

The Robinhood structure looks nothing like a traditional venture fund. There is no capital call, no 10-year lockup, no qualified purchaser requirement. The fund is a publicly traded closed-end vehicle that holds a concentrated portfolio of private company stakes, some acquired through secondary transactions, others through direct allocation. CNBC reported on April 22 that Robinhood had taken a $75 million position in OpenAI through the fund, a move that gave thousands of retail investors fractional exposure to a company that traditional LPs had spent years trying to access through specialized vehicles and fund-of-fund relationships.

The retail LP phenomenon does not replace institutional capital. The 150,000 Robinhood investors collectively represent a fraction of what a single state pension fund commits to a venture allocation in a given year. But the volume matters for two reasons. First, Robinhood has already filed for a second fund, RVII, which will target early- and growth-stage startups, signaling an intention to build a repeatable product rather than a one-off experiment. Second, the publicly traded structure creates a daily mark-to-market signal on a portfolio of private assets, something that traditional venture funds explicitly avoid by marking positions quarterly and relying on appraisal methodologies that lag public market moves.

For the institutional LP sitting across the table from a GP who is asking them to cover $300,000 in formation legal fees, the existence of 150,000 retail investors willing to buy into a venture portfolio at a premium on the NYSE introduces an awkward question: what exactly is the institutional LP paying for? Access to deal flow? Robinhood is building that. Portfolio construction? The closed-end fund's concentration risk would make a pension fund's investment committee nervous, but the retail investor does not seem to care. The ILPA's organizational expense push and Robinhood's retail LP experiment are different categories of event, but they converge on the same pressure point: the traditional venture fund structure is being unbundled.

Amid that unbundling, fund brands themselves are being remade. On April 21, the Portland Business Journal reported that Cascade Seed Fund, an early-stage vehicle based in the Pacific Northwest, had rebranded to Long Way Ventures ahead of its next fundraise. The name change is small news in dollar terms, but it captures a dynamic that matters across the venture fund cycle: the transition from a first-time fund narrative, which sells a thesis and a founding team's ambition, to a second- or third-fund narrative, which sells a track record and a durable edge. "Long Way" is a deliberate signal to LPs that the firm is not raising a fund to ride a cycle, but building an institution meant to compound across cycles.

Institutional LPs parse rebrands carefully. A firm that changes its name between Fund I and Fund II is drawing attention to the shift, which means the shift had better be substantive: a new strategy, a broader partnership, a different geography. When the rebrand is primarily cosmetic, it can backfire. LPs talk to each other, and a name change that looks like a marketing refresh rather than an organizational evolution gets noted in the reference calls that precede every commitment. The Cascade-to-Long-Way transition will be tested by whether the new fund's limited partnership agreement looks materially different from the last one, and whether the LP base expands beyond the friends, family, and local angels who backed the debut vehicle.

The fund cycle, from formation through deployment through harvesting, is also being compressed and reshaped by the liquidity picture at the top of the market. TrueBridge Capital's state of venture report in Forbes, published March 9, described 2026 as the beginning of a "value creation era," a phrase that signals a pivot from multiple expansion, which drove returns in the zero-interest-rate period, to revenue growth and margin improvement as the primary drivers of exit value. The report noted that median pre-money valuations had increased across stages, but that capital was increasingly concentrated in AI and AI-adjacent companies.

That concentration is creating a bifurcated exit pipeline. At the top, SpaceX, OpenAI, and Anthropic are all on a path toward public listings. The Information reported on May 21 that a cluster of mega-IPOs could cement the dominance of a small group of venture firms while leaving funds that missed those deals with portfolios full of companies that are too small to go public and too expensive for acquirers to absorb at premium valuations. For LPs, the difference between a fund with OpenAI exposure and one without it will be the difference between a DPI that justifies re-upping and a DPI that does not.

The ILPA's May 2026 guidance on organizational expenses should be read alongside this liquidity picture. LPs are not just negotiating legal fees in the abstract; they are negotiating from a position where their own portfolios are starved for distributions and their commitments to new funds are constrained by the denominator effect that has persisted since the 2022 correction. When an LP's private equity allocation has drifted above its target because public equities repriced faster than venture marks adjusted, every basis point of fee leakage matters. The fund formation legal bill is one of the few cost items that LPs can see and contest before a commitment is signed.

What the legal fee fight actually changes

The ILPA guidance proposes several specific reforms. GPs should bear organizational expenses directly rather than charging them to the fund. If organizational expenses are charged to the fund, LPs should have input into the selection of counsel and the setting of the legal budget. Cost overruns should be borne by the GP, not the fund. And legal fee arrangements should be disclosed transparently in the limited partnership agreement, not buried in the organizational expense line of the fund budget. None of these proposals are revolutionary in the context of other asset classes; in real estate and private equity, GP-borne organizational costs are far more common. In venture, the ILPA is effectively asking the industry to catch up to norms that other private markets adopted years ago.

The pushback from GPs, particularly emerging managers, will be predictable. A first-time fund manager raising $25 million does not have $200,000 in working capital to pay formation legal fees out of pocket before the fund holds a first close. Moving those costs onto the GP will raise the barrier to entry for new fund formation at the exact moment that LPs are already gravitating toward established platforms. The ILPA's guidance, if widely adopted, would effectively function as another filter on who gets to be a GP, compounding the structural advantages of large, multi-strategy firms that can amortize formation costs across multiple vehicles.

What to watch: the second Robinhood fund and the ILPA's next move

Robinhood's RVII filing is the next milestone to track. If the second fund attracts similar retail demand and broadens its portfolio beyond the marquee names that anchored Fund I, it will validate a channel for private company capital that operates entirely outside the institutional LP-GP relationship that the ILPA is trying to reform. That creates a paradox: the institutional LP base is fighting for better terms on fund formation costs at the same moment that a new class of capital providers, retail investors buying shares on the NYSE, is entering the asset class without any of the structural protections or governance rights that institutional LPs have spent decades negotiating.

The ILPA guidance on organizational expenses is not the last word. The association is expected to publish additional guidance on management fee structures and GP commitment levels later in 2026. Each new pronouncement will be negotiated fund by fund, term sheet by term sheet. The venture fund cycle, for all the talk of disruption from retail capital and AI-driven deal sourcing, remains at its core a relationship business governed by limited partnership agreements drafted by lawyers who charge by the hour. The question the ILPA is asking is simply who pays those lawyers. In 2026, the answer is shifting, and the shift reveals more about the balance of power in venture capital than any single deal term ever could.