Who are General Partners?
A private equity fund that is created needs to be managed. A general partner (GP) refers to the private equity firm who has the responsibility of managing a private equity fund. The private equity firm acts as a GP and the external investors are LPs.
The investors who have invested in the fund would be known as Limited Partners (LP) and the PE firm would be known as General Partner (GP).
What is the Role of a General Partner?
The general partner has the responsibility of taking all decisions related to the management of the private equity fund. There are other specific functions that the general partner carries out. For instance, General Partner must manage the private equity fund’s portfolio which consists of all funds invested by LPs.
In simple terms, the General Partner is responsible for the administration, management, and operation of the private equity fund.
PE firms function and operate under the guidance of a general partner who sources capital from various investors and manages the fund by investing this capital.
- Hence, first in the order of responsibility is the goal to raise funds, followed by administering the day-to-day operations of the private equity fund. These day-to-day operations include identifying the investment opportunities, maximizing the value of the investment and liquidating investments in a manner so that distributions can be made to LPs.
- The main objective of the GPs is to manage the private equity fund for the benefit of the LPs that have invested in it and act in the interest of the LPs.
- Given that LPs commit their funds to private equity firms and expect a positive return on their investments, the GP is entrusted with the responsibility to manage their funds to meet this objective.
- Additionally, unlike LPs, the GPs has legal liability for the actions carried out by the fund.
Compensation of General Partner
- The compensation of GPs is designed in such a manner that it aligns with the financial objectives of LPs. The GPs are either paid through a management fee or compensation.
- The general partner earns an annual management fee of up to 2% which is used for the purpose of carrying out admin duties, cover expenses to be made like overhead and salaries.
- GPs can also earn a proportion of the private equity fund’s profits and this fee is termed as carried interest. The investments made by the fund earn profits and GPs receive a share of these profits in the form of carried interest. The carried interest is usually in the range of 5% to 30%.
To get a better understanding, let us look at an example.
Let us say that a particular fund and the assets that were invested in earn a return of 100 billion US dollars. The management fee received by the GP would then amount to 2 billion. Similarly, if the return on an investment is 50 billion, the carried interest would be 20% of 50 billion in return on investment.
This has been a guide to who are the General Partners in Private Equity, what is the role of General Partners and the compensation structure including the management fees and carried interests. You may have a look at these articles below to learn more about Private Equity –