What are Private Equity Limited Partners in England?

As a business, you may come across private equity funds. Private equity firms invest private funds into companies that they believe will become more valuable in the future. Within this context, you may hear of the term ‘limited partners’ (or sometimes referred to as ‘LP’). Private equity limited partners play an important role in investing in the fund that the private equity firm uses to acquire businesses. If you are dealing with private equity firms, you may find it useful to understand the role that a limited partner plays. This article will explain what a limited partner is and what they do.

What is Private Equity?

Private equity firms are companies that deal with private equity funds. A private equity fund is typically a closed-off fund. It usually involves investment from a number of high-net worth individuals and institutional investors (such as banks). 

A private equity fund will usually use the capital that it has raised to invest in a target company. The aim is to build diverse portfolio of companies. Since the private equity firm will fundraise from a range of different investors, they can often raise very large amounts of capital. Usually, private equity funds invest in private companies, as opposed to companies that have been listed on a public exchange. The fund will then invest some of the money raised into the company itself. The ultimate aim is to help the company grow. 

At the end of the investment period (usually between five and ten years), the private equity firm will aim to sell the company. The proceeds of the sale are then divided between investors within the fund.

Private Equity Limited Partner Fund Structure

A private equity fund will have two types of partners. 

The first is a general partner (‘GP). A general partner’s role is to manage the fund and pick the target companies they wish to invest in. Usually, the individuals in charge of the private equity firm will be the general partners in a private equity transaction. General partners are also responsible for the following tasks:

• monitoring its target companies; 
• dealing with administrative tasks; 
• overseeing the fund more generally; and 
• raising funds from investors. 

The second is a limited partner (LP). Private equity limited partners, unlike private equity general partners, do not engage in the management of the fund. Instead, they are investors in the fund whose liability is limited to the amount they have invested (hence ‘limited’ partners). 

Private Equity Limited Partners

Often, limited partners are institutional investors, as not everyone can invest in a typical private equity fund. Institutional investors will include: 

• insurance companies;
• pension funds;
• banks;
• universities. 

Although they make capital contributions to the fund, a limited partner is not an investment manager. Given private equity funds have typically outperformed public markets, investment in private equity firms is increasingly common amongst large investors. 

Investing as a Private Equity Limited Partners

As a business, it can be useful to understand who private equity limited partners are if you are dealing with a private equity fund. You may come across private equity firms if you are receiving venture capital funding, or if you are looking to invest some of the money from your business. 

In this instance, it is important to understand who the fund manager is. The general partners running the fund will take a ‘carry’ (of up to 20%) alongside fund management fees as part of their role within the investment. 

As a result, it is important to understand the value that the private equity firm can add to your business or to your investment before you commit your money and time. 

Key Takeaways

Private equity limited partners play an important role in private equity funds. While general partners are responsible for the day-to-day management of the fund and will monitor portfolio companies and future investments, limited partners tend to simply put forward capital as investment. 

Importantly, the law limits an LP’s liability by the amount of their investment. Investors see this as an attractive way to manage their risk. If you are considering raising money from a private equity investor or investing in one yourself, you must understand who the general and limited partners are within the private equity firm, as this is an important aspect of the value that the fund can add.

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