Two sides of a fund: the GP and the LPs

Most private equity, venture, credit, real estate and infrastructure funds are set up as limited partnerships; in the US, often under Delaware’s partnership statute. A limited partnership has at least one general partner and at least one limited partner.

The general partner, or GP, is the manager’s vehicle: it makes the investment decisions and carries legal responsibility for the fund. People say “the GP” to mean the investment firm itself. The limited partners, or LPs, are the investors. They put up most of the money and take no part in running the fund.

The word “limited” is about risk. Under Delaware’s partnership statute, a limited partner is not liable for the partnership’s debts unless it is also a general partner, with a narrow exception for an LP that takes part in control. So an LP generally stands to lose what it committed, and no more. That limit is what lets a pension plan put a large sum into a fund it does not run.

Who are the LPs? Mostly institutions: public and corporate pension plans, endowments, foundations, insurance companies, sovereign wealth funds and family offices. Individuals invest too, but most private funds are sold only to investors who meet legal tests. In the US the best known is the accredited investor test: for a person, income over $200,000 (or $300,000 with a spouse or partner) in each of the last two years and the expectation of the same this year, or net worth over $1 million not counting their home. Holders of certain securities licences (Series 7, 65 or 82) qualify too, and there are separate tests for institutions.

The two sides do not have the same interests, and most of a fund’s rules exist to line them up. The GP usually puts some of its own money in alongside the LPs (the GP commitment), earns fees for running the fund and a share of the profits for doing it well. The LPA, the partnership agreement, sets all of this down, and a committee of LPs, the LPAC, is the investors’ standing check on the manager between meetings.