General Partner

How a general partner works

The general partner is the party that manages a fund and bears responsibility for it. The Institutional Limited Partners Association defines the general partner as the managing partner in a private equity management company who has unlimited personal liability and manages the fund on behalf of investors. Cambridge Associates puts the division of labor in one line: general partners are the fund managers, limited partners are the investors, and they invest alongside each other.

In practice, "the GP" names three different things and the distinction matters.

• The fund itself is a limited partnership. Its general partner is an entity, usually a limited liability company formed for that single fund, which holds the management powers and receives the carried interest.
• The management company is a separate operating business. It employs the investment team, holds the lease and the systems, and receives the management fee.
• The individual is a person with the title general partner. At a large firm, that title describes seniority and may or may not correspond to an ownership interest in either entity.

Unlimited liability attaches to the general partner of a limited partnership as a matter of partnership law, which is why the role is nearly always filled by an entity with limited liability of its own rather than by a person directly. The obligation exists; it is structured so that it does not reach individual balance sheets by default.

A general partner earns from three sources, and only one of them is contingent on performance.

General partner economics = management fee to the management company + carried interest to the general partner entity + return on the general partner commitment

The fee funds the business. Carried interest is the profit share, described by Cambridge Associates as generally a fixed 20 percent of cumulative net gains of the partnership. The commitment is the manager's own money in the fund, and ILPA's Principles are specific about it: the general partner should have a substantial equity interest in the fund, and the commitment should be contributed in cash rather than through the waiver of management fees or via specialized financing facilities.

ILPA's Principles also restrict how the general partner may invest alongside its own fund. The general partner should not be allowed to cherry-pick select underlying deals; its whole equity interest should come through a pooled vehicle whose sharing percentage may not decrease. The Principles further ask that ownership of the management company be proactively disclosed, that limited partners be notified if that ownership changes over the fund's life, and that the general partner be restricted from transferring its real or economic interest in the general partner entity, with notification to limited partners of any intent to transfer, however small.

The general partner's authority is broad but bounded. It selects investments without limited partner approval, but the limited partnership agreement constrains it through investment restrictions, key person provisions that suspend the investment period if named individuals stop devoting their time, removal rights for cause and sometimes without cause on a supermajority vote, advisory committee approval for conflicts, and a fiduciary standard of care that ILPA's Principles ask not be waived or diluted.

Worked example

Suppose a venture manager raises a 150 million dollar fund with a 2 percent management fee, a 20 percent carry, a whole-of-fund waterfall, no preferred return, and a general partner commitment of 1 percent contributed in cash. All figures are hypothetical.

Step one: the commitment. Total commitments are 150 million dollars, of which the general partner funds 1.5 million and limited partners fund 148.5 million. The general partner's sharing percentage is 1 percent.

Step two: the fee. During the five-year investment period the fee is 2 percent of the 150 million dollar commitment base, or 3 million dollars a year, paid to the management company. That is revenue, not profit: it pays salaries, rent, audit, administration, legal and travel for a team that may be six or ten people. After the investment period the fee steps down, which ILPA's Principles say should happen significantly, to a percentage of unrealized cost.

Step three: the outcome. Over ten years the fund distributes 375 million dollars, which is 2.5x the 150 million contributed. That multiple is before carried interest and already net of the management fee, because the fee was called out of the same 150 million.

Step four: the waterfall. The first 150 million goes back to all partners in proportion to contributions. Profit above that is 225 million dollars. The general partner entity takes 20 percent of it as carried interest: 45 million dollars.

Step five: the general partner's total. Carry of 45 million, plus its 1 percent share of the 330 million distributed to partners, which is 3.3 million on its 1.5 million commitment, plus 15 million of management fees across the five-year investment period and a stepped-down amount for the years after it, most of which was spent running the firm. The carry is the number that matters and it exists only because the fund tripled the profit threshold.

Step six: the limited partner's side. Limited partners contributed 148.5 million and received 99 percent of 330 million, or 326.7 million, which is 2.2x. The gap between 2.5x and 2.2x is 44.55 million, their share of the carried interest. The management fee does not appear as a further deduction because it was already funded out of the 148.5 million they contributed, which is exactly why lifetime fees are read as a reduction in capital available to invest rather than as a line against proceeds.

Where it shows up

In the limited partnership agreement, the general partner is named in the first pages and its powers are set out in a management article: authority to make and dispose of investments, to call capital, to incur fund expenses and to bind the partnership. The same document contains the constraints: investment limitations, the standard of care, indemnification, key person triggers, removal for cause and no-fault removal thresholds, and the advisory committee's consent rights.

In the general partner entity's own operating agreement, the carried interest is divided among individuals as points, with vesting and treatment on departure. Limited partners generally do not see this document, though ILPA's Principles ask for disclosure of management company ownership and notice of changes to it.

In the management agreement between the fund and the management company, the management fee is set: the rate, the base it is charged on, the step-down after the investment period, and the offsets. ILPA's Principles state that any portfolio company fees charged should be 100 percent offset against the management fee.

In the private placement memorandum and the due diligence questionnaire, the general partner's team, track record, attribution of prior deals, decision process and the size and funding source of its commitment are the core of what a limited partner evaluates.

As an investment adviser, the manager also files with the Securities and Exchange Commission on Form ADV, and when it presents performance in marketing materials it is subject to the marketing rule, which requires any gross performance figure to be shown alongside net performance with at least equal prominence over the same period.

Common mistakes

• Reading the title as the economics. Many people carry the title general partner at large firms without holding an interest in the general partner entity or a meaningful share of carry.
• Treating management fees as manager profit. The fee funds the firm's operating costs; at a small fund it often barely does.
• Assuming a general partner commitment is cash. ILPA's Principles specifically ask that it be cash rather than a management fee waiver, because a waiver puts nothing at risk.
• Assuming personal unlimited liability. The role carries it in principle, which is why the general partner is an entity with limited liability in practice.
• Expecting limited partners to approve investments. They do not. Their influence is in the terms, the advisory committee, the key person clause, and the next fundraise.
• Ignoring the succession question. A firm where carry and management company ownership sit with one or two people has a key person problem that surfaces at the next fund.
• Confusing the general partner with the investment committee. The committee makes the decision; the general partner entity is the legal actor.

Related terms

The general partner is the counterparty to the limited partner, compensated by the management fee and carried interest, with its own money in the fund through the GP commitment. Its share of proceeds is determined by the distribution waterfall, gated by the hurdle rate and protected against overpayment by the clawback. The structure is the standard one across venture capital funds.

Frequently asked questions

What is a general partner in private equity?

The manager of the fund. The general partner raises the capital, decides what the fund invests in, manages those investments and returns proceeds to investors. ILPA defines it as the managing partner in a private equity management company with unlimited personal liability who manages the fund on behalf of investors. In practice the role is filled by a purpose-formed entity, not by an individual.

How does a general partner make money?

Three ways: the management fee, which funds the firm's operations and is charged whether or not the fund performs; carried interest, a share of profits, generally around 20 percent of cumulative net gains; and the return on the general partner's own commitment to the fund. Only the second and third depend on results.

What is the difference between a general partner and a limited partner?

The general partner manages and is liable; the limited partner funds and is passive with liability capped at its contribution. Cambridge Associates notes that limited partners typically supply an overwhelming percentage of a fund's capital, often 98 percent, with the general partner commitment making up the balance.

How much does a general partner invest in its own fund?

Enough to be substantial, which ILPA's Principles require without fixing a number, and it should be contributed in cash rather than through a fee waiver. The figure is disclosed in fundraising materials and is one of the standard diligence questions, because it determines how much of the manager's own money is exposed to the same outcome as the investors'.

Can limited partners remove a general partner?

Usually yes, under two different standards written into the partnership agreement: removal for cause, which requires specified misconduct and a lower voting threshold, and no-fault removal, which requires a supermajority of limited partner interests. Key person provisions are the more common intervention, suspending the investment period automatically if named individuals stop devoting the agreed time.

Is a general partner personally liable for a fund's obligations?

The general partner of a limited partnership has unlimited liability for partnership obligations, which is the legal default ILPA's definition reflects. Funds are structured so that this liability lands on an entity formed for the purpose rather than on individuals, and the partnership agreement adds indemnification from fund assets for actions within the standard of care.