What Is a General Partner (GP) in Finance?

A General Partner (GP) in finance is an individual or entity that actively manages an investment fund. GPs make strategic investment decisions and oversee the fund’s operations, particularly within alternative investments like private equity, venture capital, and hedge funds.

Understanding the General Partner Role

A General Partner (GP) is an individual or entity that actively manages an investment fund. GPs are directly involved in the fund’s daily operations and decision-making, identifying, evaluating, and executing investment opportunities that align with the fund’s strategy.

Their involvement spans the entire lifecycle of a fund, from raising capital to managing investments and exiting them. This active management differs from the role of Limited Partners (LPs).

Limited Partners (LPs) are passive investors who contribute capital but have no involvement in daily management or investment decisions. A distinction between GPs and LPs is liability. GPs assume unlimited personal liability for the fund’s debts and obligations. LPs benefit from limited liability, with their financial risk capped at their invested capital.

GPs bring expertise to manage capital provided by LPs. This arrangement allows LPs to gain exposure to alternative investments, relying on the GP’s ability to drive strategy and generate returns. The GP’s compensation aligns their interests with LPs, incentivizing performance.

Structuring a General Partnership

General Partners use legal structures to manage investment funds. The most common entity for a fund involving a GP is a limited partnership. Within this structure, the General Partner is often a separate legal entity, frequently a Limited Liability Company (LLC).

Using an LLC as the General Partner entity mitigates the unlimited liability associated with the GP role. While the GP entity still has unlimited liability within the limited partnership, the LLC structure shields individual fund managers from personal liability for the fund’s debts. Creditors can pursue the LLC’s assets but not the personal assets of its members.

The relationship between the GP and LPs, and the fund’s operational guidelines, are formalized in the Limited Partnership Agreement (LPA). This agreement specifies the GP’s rights, responsibilities, compensation, and fund operating conditions. It also outlines LPs’ rights and profit distribution.

For tax purposes, limited partnerships and LLCs employ a “pass-through” taxation model. The fund does not pay income tax at the entity level; instead, income and losses pass through to the partners or members. They report and pay taxes on their share on individual tax returns.

General Partner Compensation

General Partners are compensated through two mechanisms: management fees and carried interest. These structures cover operational costs and incentivize strong performance.

Management fees are annual charges paid by Limited Partners to the General Partner or an affiliated management company. These fees are calculated as a percentage of the fund’s committed capital, ranging from 1.5% to 2.5% annually. They cover ongoing operational expenses, including salaries, office space, and administrative costs.

Carried interest, or “carry,” is a share of the fund’s profits the General Partner receives. This performance-based compensation is set at 20% of the fund’s net profits, after LPs receive their initial investment back and sometimes a preferred return. A “preferred return” is a minimum rate of return, 7% to 9%, that LPs must achieve before the GP receives carried interest.

Profit distribution, including carried interest, is governed by a “distribution waterfall” model. This model outlines how investment proceeds are distributed among LPs and the GP. The waterfall ensures LPs recover their capital and preferred returns first, then the GP receives their share of profits. For tax purposes, carried interest is treated as long-term capital gains if underlying assets are held for over three years.

Responsibilities and Obligations of General Partners

General Partners bear responsibilities and legal obligations to their Limited Partners and the investment fund. A primary obligation is their fiduciary duty, mandating that GPs act in the best interests of the fund and its investors. This duty requires transparency, responsible investment management, and avoiding conflicts of interest.

Investment management is a responsibility of GPs. This includes identifying and evaluating investment opportunities aligned with the fund’s strategy. After investments are made, GPs oversee the portfolio, monitoring company performance and providing strategic guidance. This extends to managing the exit of investments to generate fund returns.

Fundraising and investor relations are part of a GP’s duties. GPs secure capital commitments from new LPs and maintain relationships with existing investors. This involves regular reporting on fund performance, addressing inquiries, and ensuring clear communication throughout the fund’s lifecycle.

General Partners must ensure the fund’s compliance with legal and regulatory frameworks. This includes adhering to securities laws, tax regulations, and industry-specific rules. The accountability associated with the GP role is substantial, as their decisions directly impact financial outcomes for all investors.