photo credit: Idea Mensch

Key Takeaways

• Private equity funds are typically structured as limited partnerships (LPs), consisting of general partners (GPs) and limited partners (LPs).
• General partners manage fund operations, make investment decisions, and earn through management fees and carried interest.
• Limited partners provide the bulk of capital, enjoy limited liability, and may serve on advisory committees without managing day-to-day operations.
• LPs include sovereign wealth funds, pensions, endowments, and high-net-worth individuals, often pushing for transparency and responsible investing.
• Understanding the roles of GPs and LPs is crucial for grasping how private equity generates returns and manages risk.

Zac Barnett is a pioneering fund finance attorney with more than two decades of experience structuring and negotiating facilities for private equity sponsors. As co-founder of Fund Finance Partners, LLC, he advises on subscription lines, hybrid, secondary, and fund-of-hedge-fund facilities, bringing a track record of 500+ completed transactions and approximately $250 billion in lender commitments. Barnett’s work spans real estate, infrastructure, and private credit, where he helps sponsors design creative financing strategies that optimize returns while managing risk.

A recognized thought leader, he co-founded the Fund Finance Association Annual Symposium and has been published in outlets such as Bloomberg and the Los Angeles Times – credentials that underscore his credibility and depth in fund finance.

A private equity (PE) fund is an investment instrument that pools capital from investors to acquire, manage, and eventually sell private companies for a profit. A private equity fund is typically a limited partnership (LP), a legal structure that balances responsibilities, risks, and rewards.

Two types of partners in a limited partnership are general partners (GPs) and limited partners (LPs). General partners are typically fund managers, responsible for investment decisions and managing fund operations while working closely with the companies in which the fund invests. Limited partners are investors who provide a significant amount of the funds but are not directly involved in the daily administration. These two groups may involve different stakeholders, such as co-investors, institutional investors, and family offices, each playing specific roles.

An understanding of how these partners fit into the fund’s structure is essential for comprehending how private equity operates.

The GP is the office or team that manages the fund. The GP is typically an investment firm that sets up the fund, raises money for investors or LPs, and runs all of the fund’s operations. The GP highlights the fund’s strategy and goals. After the fund starts operating, the GP seeks companies in which to invest. GPs typically analyze the legal status, operations, and finances of these companies to ensure they are suitable for investment. After GPs decide to invest in a company, they regularly work with the company’s leadership to improve its strategy, oversee management, and enhance performance. GPs also determine when and how their company should sell the investment to generate a return.

Companies pay GPs through a combination of management fees and performance-based incentives. The management fee, which initially ranges between 1.5 percent and 2.5 percent per annum of the fund’s assets under management (AUM) and steps down each year, covers the daily operating expenses of managing the fund, including staffing, deal sourcing, legal and compliance work, and general administration. GPs also earn “carried interest,” a share of the profits commonly set at 20 percent.

Limited partners (LPs) typically provide the capital for private funds. LPs originate from diverse backgrounds, including sovereign wealth funds with substantial government-managed assets, university endowments, charitable foundations seeking consistent financial growth, and pension funds that require long-term returns to support their retirees. Other LPs include banks, insurance companies, and high-net-worth investors who intend to diversify their portfolios.

Although LPs are not involved in the daily administration of the funds, they receive updates on the administration and performance of the funds. Some LPs constitute advisory committees and might proffer advice. Companies may invite LPs to participate in advisory committees where they provide feedback on governance, conflicts of interest, or major fund activities. LPs enjoy limited liability, meaning their financial exposure is capped at the amount they have committed, protecting them from any debts or obligations the fund incurs.

Finally, LPs, especially institutional investors, carry a broader fiduciary responsibility to the people or organizations they represent. This means they not only assess legal structures and promote transparency, but also make sure their investment choices align with ethical standards.

Many LPs encourage greater diversity among fund managers, actively supporting responsible investing. They also ensure that GPs meet legal and regulatory requirements, often using third-party audits or legal reviews to keep things on track.

FAQ

What is the difference between general partners (GPs) and limited partners (LPs) in private equity?

GPs manage the fund, make investment decisions, and oversee portfolio companies, while LPs provide capital, assume limited liability, and may advise but don’t manage operations.

How do general partners make money in private equity funds?

GPs typically earn a management fee (1.5%–2.5% of AUM annually) to cover operations and a performance-based incentive called carried interest, often 20% of profits.

Who can be limited partners in a private equity fund?

LPs include sovereign wealth funds, university endowments, pension funds, charitable foundations, insurance companies, banks, and high-net-worth individuals.

Do limited partners have any say in fund management?

While LPs are not involved in daily operations, they may sit on advisory committees, offering feedback on governance, conflicts of interest, or major fund activities.

What responsibilities do institutional LPs have?

Institutional LPs have fiduciary duties to those they represent. They promote transparency, ensure compliance, and increasingly advocate for diversity and responsible investing.