What Is the Difference Between LP and GP in Private Equity?

Private equity is an alternative investment vehicle that pools capital to acquire and manage private companies not traded on public stock exchanges. These funds aim to enhance the value of acquired businesses before selling them for a profit. This investment structure involves two primary participants: those who contribute capital and those who actively manage investments. This arrangement forms a partnership with clearly defined roles and responsibilities to facilitate the fund’s operations and investment strategies.

Limited Partners

Limited Partners (LPs) are the capital providers in a private equity fund, serving as crucial investors without direct involvement in the fund’s day-to-day operations or investment decisions. Typical LPs include large institutional investors such as pension funds, university endowments, sovereign wealth funds, and charitable foundations. High-net-worth individuals and family offices also participate as LPs, contributing capital to these funds.

LPs commit capital to the private equity fund, which fund managers draw down as needed for investments and operational expenses. This process, known as a capital call, allows LPs to retain their committed funds in other investments until the private equity firm identifies a suitable opportunity or requires capital for fees. LPs receive a formal request for funds when a new investment deal is finalized.

LPs have limited liability, meaning their financial risk is capped at the total amount of capital committed to the fund. If the fund incurs debts or losses, an LP is not personally responsible for obligations beyond their committed investment. This protects an LP’s personal or institutional assets from the fund’s liabilities.

LPs maintain a passive role, avoiding involvement in the management of portfolio companies or the fund’s strategic decisions. Their influence is exercised through the initial selection of the private equity firm and the terms outlined in the Limited Partnership Agreement (LPA). LPs expect financial returns on their invested capital, aligning their interests with the fund’s overall performance.

General Partners

General Partners (GPs) are the active managers of private equity funds, often representing the private equity firm. They oversee and strategically direct the fund’s investments and operations. Unlike LPs, GPs are involved in every stage of the investment lifecycle, from identifying potential targets to managing their eventual exit.

GPs actively seek new investment opportunities, conduct thorough due diligence on prospective companies, and negotiate acquisition terms. Following an investment, GPs work closely with the management teams of acquired portfolio companies. They provide strategic guidance, implement operational improvements, and drive growth initiatives to enhance company value and achieve profitable exits through sales or public offerings.

A significant distinction for GPs lies in their liability. GPs typically bear unlimited liability for the fund’s debts and obligations, meaning their personal assets could be at risk. However, the general partner entity is often structured as a limited liability company (LLC) or similar corporate vehicle. This structure limits the personal liability of individual fund managers to the assets held within that specific GP entity.

GPs are responsible for raising capital from LPs during the fund’s fundraising period. They develop the investment strategy, present it to potential investors, and manage ongoing communication and reporting of fund performance. Their active management and decision-making authority are central to the private equity model.

Relationship and Key Distinctions

The relationship between Limited Partners (LPs) and General Partners (GPs) forms the private equity fund structure, typically organized as a limited partnership. This legal framework defines their distinct roles, liabilities, and financial arrangements. The fund is often established as a separate legal entity, such as a Limited Partnership (LP) or Limited Liability Company (LLC), providing benefits like limited liability for investors.

A key distinction between the two roles is the provision of capital versus the management of investments. LPs are passive investors, providing the financial capital necessary for the fund to operate and make investments. GPs are active managers, leveraging their expertise to identify, acquire, manage, and divest portfolio companies. This allows LPs to gain exposure to private market returns without direct operational involvement, while GPs focus on value creation.

The difference in liability is another characteristic. LPs benefit from limited liability, with financial exposure restricted to the capital committed to the fund. GPs typically face unlimited liability for the fund’s obligations, though this is often mitigated by structuring the general partner as a separate limited liability entity. This reflects the active management role of GPs versus the passive investment role of LPs.

GPs hold direct control over investment decisions and the fund’s daily operations. They are responsible for strategic choices related to the fund’s portfolio, from deal sourcing to exit strategies. LPs provide capital but do not possess direct control or decision-making authority over investment matters, relying on the GP’s expertise and the Limited Partnership Agreement terms.

The compensation structure for GPs incentivizes performance. GPs typically receive two main types of fees. The first is a management fee, an annual charge paid by LPs to cover the fund’s operational expenses, including salaries, administrative costs, and due diligence. This fee commonly ranges from 1.5% to 2% of the committed capital during the fund’s investment period, which usually spans three to five years, and may decrease over the fund’s life.

The second component of GP compensation is carried interest, also known as “carry.” This represents a share of the fund’s profits, typically 20%, paid to the GP after LPs have received their initial investment and a predetermined minimum return, called a “hurdle rate.” This hurdle rate is commonly set around 8% annually. For example, if a fund generates profits beyond the hurdle rate and returns the LPs’ initial capital, the GP receives 20% of the remaining profits, with LPs receiving the remaining 80%.

This performance-based compensation model, particularly carried interest, aligns the financial interests of GPs and LPs. The GP is directly incentivized to maximize the fund’s returns, as their significant share of profits depends on the overall investment success. GPs also report fund performance and communicate key developments to LPs, fostering transparency and trust within the partnership.