What Are Private Equity General Partners?

As a business, you may come across private equity funds, for instance, in the course of trying to sell your business. Private equity firms (or ‘PE firms’) specialise in acquiring private — i.e. companies not publicly traded — for the purposes of later selling them in the future. Within a private equity fund structure, private equity general partners play an important role This article will explain a general partner’s role in a private equity fund so you can better appreciate how private equity firms work. 

What is a General Partner?

A general partner (or ‘GP’) is in charge of managing a private equity fund. Specifically, they determine which businesses to acquire and how they should be managed. The GP is typically a company composed of professional investors and business managers. In most cases, the GP will also contribute a percentage of the capital used to acquire companies to demonstrate they have a financial commitment to the success of the investment venture. 

Standing opposite GPs are the limited partners (LPs), which are all of the other investors that have contributed capital to funds used to acquire private companies. Limited partners gain their name from the legal structure most PE funds use to structure the investment, namely, limited partnerships. In exchange for abstaining from the management of the fund, the LPs obtain the benefit of limited liability. That is, they are only liable to third parties up to the extent of their investment. 

In contrast, GPs bear unlimited liability. This means that if a third party sues the fund, they can pursue the GP in their personal capacity. 

LPs tend to be institutional investors like insurance funds and pension funds, as well as high networth individuals. 

What Do Private Equity General Partners Do?

A general partner is responsible for the day-to-day management of the fund. This includes the following. 

Building the fund management team 

The GP will select the group of investment professionals that will identify companies to acquire, sometimes called the investment committee. Where the GP is a private equity firm, as is often the case, the investment committee is often already in place. However, in some cases, a GP may assemble an investment committee from third party private equity houses. 

Likewise, the GP will select the professional that will be involved in the operation of the companies after the fund has acquired them. 

Coordinating financial and legal advisers

All PE funds require the advice of financial advisers, including investment banks and accountants and legal teams. The GP will source the advisers. 

Portfolio construction

The GP (through its selected investment committee) will identify which companies it should acquire. Unless it is a term of the investment agreement which companies the fund will acquire, the LPs rarely have any influence over this process. 

When investors refer to PE portfolios, they refer to the fact that most PE funds own more than one company. The portfolio refers to all the companies the PE fund owes. 

Portfolio management 

PE funds make a profit by selling their acquired companies for more than what they paid for. Therefore, once the fund has acquired the company, oftentimes, the fund will take an active management position in the company. For instance, the fund may sell off certain assets, authorise the company to borrow money, and close offices to improve profitability. The GP is ultimately responsible for the management.

Disposing of portfolio companies 

GPs determine when to sell each portfolio company, on what terms, and to which buyer. 

Private Equity General Partners Compensation 

GPs usually get paid in three ways. Primarily, private equity general partners will earn ‘carried interest’, sometimes referred to as ‘carry’. When the fund produces returns (for example, through selling a portfolio company), the private equity general partners receive a percentage of the profit, which is often 20% of the total returns. For instance, if after all a PE’s portfolio companies have been sold, the fund makes £100m in profit, the GP may take £20m of this. 

Alongside this, general partners also receive fund management fees. A typical management fee is 2% of the capital raised. Therefore, if the fund raises £80m, the GP collects £1.6m in management fees. 

In addition to this, if a GP invests its own capital in the fund (as is typical), they are entitled to their portion of profits. 

Key Takeaways

As a business owner, you may be curious about the role of a general partner (GP) in a private equity fund. Private equity general partners manage the fund’s operation, including identifying which companies to buy and when to sell them later. Likewise, they are responsible for finding other investors, called limited partners and raising the capital used to acquire companies. GPs monitor the fund’s collection of acquired companies and manage the individual companies as needed. 

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