What Is a General Partner (GP) in Private Equity?

Private equity involves investments in companies not publicly traded on a stock exchange. These investments aim to increase a company’s value and sell it for profit. The General Partner (GP) is a central figure in managing these private investments, playing a significant role in their operation and success.

Defining the General Partner (GP)

A General Partner (GP) is the managing entity of a private equity fund, overseeing its day-to-day operations and making investment decisions. Private equity funds are commonly structured as limited partnerships, where the GP takes on an active management role. This contrasts with Limited Partners (LPs), who are passive investors providing capital without involvement in the fund’s operational management.

The GP is responsible for forming and administering the investment vehicle through which capital from LPs is deployed into various companies. A key distinction lies in liability: the GP bears unlimited personal liability for the fund’s debts and obligations, whereas LPs’ liability is limited to the amount of capital they have invested. However, the GP entity is often structured as a Limited Liability Company (LLC) to mitigate personal liability for the individuals managing the fund.

Core Responsibilities and Operations

General Partners have responsibilities throughout the private equity fund’s lifecycle, managing the fund and its investments. Their duties begin with fund management, involving overseeing capital calls from Limited Partners as investment opportunities arise. They also manage the fund’s treasury and ensure compliance with the terms outlined in the Limited Partnership Agreement.

GPs’ role involves investment sourcing and due diligence, including identifying potential target companies, conducting thorough research, and evaluating their financial health, market position, and growth prospects. Following identification, GPs are responsible for deal execution, including structuring and closing investment transactions. This involves negotiations, legal documentation, and financial arrangements to acquire stakes.

After an acquisition, GPs engage in portfolio management and value creation. They improve the operational and strategic performance of their portfolio companies. This can involve streamlining processes, reducing costs, driving revenue growth, implementing new technologies, and recruiting key talent to enhance the company’s overall value. The ultimate goal of these efforts is to prepare the companies for a profitable exit.

GPs strategize and execute exit strategies, such as selling the company to another entity or taking it public through an Initial Public Offering (IPO), to realize returns for investors. Throughout the fund’s life, GPs provide regular and transparent reporting to Limited Partners, detailing fund performance, the status of portfolio companies, and financial results.

GP Compensation Structure

General Partners are compensated through a structure designed to cover their operational costs and incentivize strong performance. The two primary components of this compensation are management fees and carried interest. This fee arrangement is typically outlined in the Limited Partnership Agreement (LPA) between the GP and LPs.

Management fees are annual charges paid by Limited Partners to the General Partner, ranging from 1.5% to 2.5% of the committed capital or invested capital. These fees cover the GP’s operational expenses, including salaries for the investment team, office space, legal and administrative costs, and expenses for sourcing and due diligence. During the initial investment period, often three to five years, fees are commonly based on committed capital, and may decrease or be calculated on net invested capital after this period.

Carried interest, or “carry,” is the GP’s share of the profits generated by the fund’s investments. This performance-based incentive aligns GP and LP interests, as GPs only earn carry if the fund performs well. The standard carried interest percentage is around 20% of the profits, but it can range from 15% to 30%.

Before the GP receives carried interest, LPs must first receive their initial investment plus a minimum return, known as the “hurdle rate” or “preferred return.” This hurdle rate is set between 7% and 10% annually. Once this hurdle is cleared, the GP receives their percentage of the remaining profits. Carried interest is generally treated as long-term capital gains for tax purposes in the United States, provided specific holding period requirements are met, resulting in a potentially lower tax rate compared to ordinary income.